When picking an investment fund, you’re sometimes faced with an impossible list of choices to pick from. Should you put your money into equities or bonds? What market are you going to invest into – you know the UK stock exchange? Right. But maybe you can get better returns in the US, Asia or an Emerging Markets fund? If equities is your poison, Growth or Value? Do you want your fund actively or passively managed? If bonds, Short-term or Long-term? How do the fees work?
A lot of choices to make before you even fill in an application form and give your hard-earned cash to some faceless folks in suits in the City. The big first question is whether to opt for shares or bonds. These markets in normal conditions operate in different ways. Sometimes, in a growth phase of the economy, equities are flying. But when the bulls are running out of steam, and when the bears emerge from hibernation and crawl out of their caves, at the end of the economy’s growth cycle, interest rates are typically low, and bond prices are high. This means that investors can buy bonds at a discount and potentially earn higher returns when interest rates rise in the future.
Timing the markets
It comes down to a matter of timing. You don’t want to be trying to sell when the market starts a fire sale; in the same way as you don’t want to be buying when everyone is rushing into the market with fistfuls of dollars. I’m always caught out on the timing.
Perhaps taking a more balanced approach is the way ahead. And in this vast universe of funds there are plenty of balanced fund options out there.
Balanced funds in the UK are a type of mutual fund that invests in both equities and bonds. The exact mix of equity and bonds varies depending on the fund, but it is typically around 50/50. Balanced funds are designed to provide investors with a balance of capital growth and income. Balanced funds are generally considered to be a lower-risk investment than pure equity funds, but they also have the potential to generate lower returns.
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It is important to note however, balanced funds are subject to the same market risks as other types of investments, such as the risk of stock market volatility and bond interest rate risk. That said balanced funds are a good option for investors of all risk tolerances. Investors who are more risk-averse may choose a balanced fund with a higher allocation to bonds, while investors who are more risk-tolerant may choose a balanced fund with a higher allocation to equity.
There are a number of key advantages to a multi-asset fund, primarily diversification as balanced funds invest in both equities and bonds, which can help to reduce risk. Equities have the potential for higher returns, but they also tend to be more volatile. Bonds, on the other hand, are generally less volatile, but they also offer lower returns. By investing in both stocks and bonds, balanced funds can help to reduce the overall volatility of your portfolio while still providing the potential for growth.
Balanced funds offer investors a one-stop shop
It’s also a convenient way of investing across the whole economy without having multiple funds (and multiple fees) and having to time your trades, as balanced funds offer investors a one-stop shop for their investment needs. Instead of having to choose and manage individual stocks and bonds, investors can simply invest in a balanced fund and let the fund manager do the work for them.
However, balanced funds have some drawbacks, not least lower returns. A balanced fund will typically have a lower return than a pure equity fund over the long-term. This is because they invest in a mix of stocks and bonds, and bonds tend to generate lower returns than stocks.
By opting for a balanced fund however, you as an investor cede control to a team of fund managers, and you have to trust their discretion to create the right mix of assets and time exposures to different asset classes. Remember, if the stock market experiences a major downturn, balanced funds will lose value. Additionally, if interest rates rise, the value of balanced funds will likely decline.
Balanced funds can be a good option for investors who are saving for retirement or other long-term goals. However, if you are looking for a more aggressive investment with the potential for higher returns, a balanced fund may not be the right choice for you.
The average balanced fund returned +10.15%
Nevertheless, over the past few years – which have been unusual to say the least – balanced funds have been a good choice. According to Morningstar, to date (26th September) (the average) balanced fund has outperformed (the average) single asset class funds over one-year, three-years and five-years.
Over one-year the average balanced fund returned +10.15% against +9.38%. Over three-years, balanced funds returned +7.84% against +7.09%, and over five-years balanced funds returned +9.38% against +8.57% for single asset class funds.
Of course, that is an average, and there are good funds and bad funds in that mix. One of the balanced funds we are looking at is the Schroder Multi Manager Diversity Fund Z which is available on many popular platforms in both income and accumulator units.
The umbrella fund was launched in May 2002, with the specific unit types being launched in July 2010, has more than GBP420m assets under management (AUM) and aims to provide capital growth in excess of the UK Consumer Price Index (after fees have been deducted) over a five- to seven-year period by investing in a diversified range of assets worldwide.
The fund was originally a Cazenove Asset Management initiative, but when Cazenove was acquired by J.P. Morgan, and Cazenove Capital, the company’s asset management arm, was absorbed ten years ago by Schroder, the London Wall based asset manager took over the running of the fund and its sub-funds and rebranded it a Schroder product.
Schroder Multi Manger Diversity fund has a flexible mandate
It’s an actively manged fund that invests in other funds (so a fund-of-funds) including in-house Schroder products, but also has the flexibility to invest in single-name company shares and bond issues and will use derivates to manage risk.
The range of funds Schroder Multi Manger Diversity fund can approach spans the whole range of investment classes, including hedge funds and private equity, money market funds, REITs and commodities and can commit the entire portfolio to collective investment schemes. The company also uses money market funds and the money market to manage its liquidity, so there is truly something in there for everyone.
One-third of AUM is committed to equities, either directly or through third-party managers, one-third in bonds, either fixed- or floating-rate and one-third into alternative assets. The management team are approaching investment like the first guests at an open buffet; picking a few of the best bits from a range of options and putting them on a plate.
There is some wiggle-room in asset allocation and the managers are given the discretion to veer away from the equity allocation by + or – 5%. This is widened to + or – 10% for alternative investments, bonds and cash, so has the option of going more aggressive in a growth cycle and becoming more defensive in a downturn.
Although benchmarked against UK CPI, a comparator is the IA Mixed Investment (20%-60% equity) class average return.
Managed by a tag-team of Joe Le Jehan and Robin McDonald, Le Jehan has manged the fund since 2019, joining Schroder after four years at Cazenove when the investment firms merged and has been on the multi-manager brief in various aspects since becoming a fund manager after an early career with PWC. McDonald was also a Caznove alumni, having joined Caz in 2007 after starting out at Gartmore Investment Management, with his career history predominantly in the multi-manager sphere.
Top of the charts
To the end of last month over cumulative 10-year, five-year and three-year periods the fund has smashed its benchmark as well as the competition. Over 10-years, the fund offered +40.9% against a benchmark of +33.2% and a class average of +39.2%. The fund beat UKCPI by 3.3 percentage points over five-years and the average Mixed Investment fund (Equity 40%-60%) by 20.3 percentage points.
Over thee-years, the fund offered a +21.8% return against a benchmark return of +20% and comparator fund of +3.7% However – understandably given the abnormal inflation of the past year – this outperformance switched to underperformance over one-year (to end-August) of 1.5 percentage points, given UK CPI was 6.8%., although the fund maintained clear blue water to its average competitor of 5.6 percentage points.
Schroder Multi Manger Diversity fund top five holdings
| Fund | % Holding |
| Schroder SSF Sterling Liquidity+ | 24.2 |
| Invesco Tactical Bond | 7.8 |
| MAN GLG UK Absolute Value | 7.0 |
| Jupiter Special Situations | 7.0 |
| GAM UK Equity Income | 6.5 |
Source: Schroder, 30th August 2023
The fund is still, at the end of last month, heavily exposed to Alternative Investments, with a 28.9% exposure, but perhaps as a reflection of uncertain markets, the next biggest holding was cash at 24.9% of AUM.
Bonds and equity were not the flavour of the day, with allocations of 14.5 and 14.4% respectively. Being dead centre of the risk-reward profile chart, the fund charges no entry or exit charges or performance fees and has an ongoing charge of 1.3%.
