AJ Bell funds update

The AJ Bell funds are managed by the team at AJ Bell Investments, with one aim: helping you invest. We look after the funds and make the daily decisions to keep your money working hard for you.

That means, from time to time, we’ll make updates to the funds in response to differing market conditions. In this article, we’ll take you through the recent changes to the AJ Bell funds we've made, and why.

Market outlook 2022

Going into this year, there were two main themes for investors: the seemingly unstoppable rise of stock markets during the covid-19 pandemic, and inflation . In the last year, rising levels in the price of goods hit 10-year highs in developed nations. The Bank of England responded in late 2021 by raising interest rates for the first time since before the pandemic – with another rise following in February 2022.

Despite business interruptions due to global lockdowns, the US main share index, the S&P 500, returned nearly 30% in 2021 – much higher than its long-term average. However, the old adage in investing is that past returns are no guarantee of future returns. Some investors believe that share prices are unsustainably high and could come down soon, or at least fail to repeat the gains they delivered in 2021.

As we enter a third year of living with covid-19, in a world where higher inflation seems to be persisting, we’ve updated our asset allocation accordingly. This has meant reducing investments we think could struggle in this environment, and identifying growth areas in the market we believe could do well. We’ve taken into account not only shares but bonds, which move in the opposite direction to interest rates and inflation (i.e. when interest rates go up, bond prices go down). Alternative investments – such as infrastructure – are another area of the investment landscape that we’ve modelled.

Let’s look at the changes we’ve made in more detail:

AJ Bell Growth Funds

In the Cautious and Moderately Cautious funds, we have significant holdings in cash and bonds. As inflation expectations increase, bonds with a long time until expiration tend to perform badly. So in response, we’ve taken the opportunity to reduce the average expiration date (also known as maturity) of our cash and bond holdings. We’ve also moved to high quality bonds here, which tend to perform better when share markets fall.

As well as allocating to different regions and countries, we also invest in shares in different sectors. This broadens the holdings in the portfolio, while allowing us to benefit from changing themes. This year in the higher risk portfolios, we’ve switched from the consumer discretionary sector (investing in the likes of Amazon and Tesla) into financials. Our rationale here is again linked to the idea that higher inflation and interest rates tends to benefit banks and insurance companies. We’ve also used the rebalance as an opportunity to exit our position in utilities, which has performed ahead of our expectations.

In the Global Growth fund (the highest risk fund that we manage), we’ve made additional changes. We’ve moved away from holding a high percentage of US shares, and invested in European companies to balance out the fund. We’ve also reallocated some of the global shares to smaller companies. These have lagged behind big name stocks recently, but are usually expected to outperform during the early stages of an economic recovery.

We also have small positions in alternative investments, such as infrastructure. These investments don’t move in the same patterns as regular stocks and bond markets – so can be a useful additional source of returns.

New funds and their allocations

Removed fund allocations

Updated allocations

AJ Bell Income Funds

We've made similar changes to bond holdings in our income funds as in our growth funds. That is, we’ve increased the quality of the bond issuers and reduced the bonds’ maturity.

Additionally, we’ve reduced the amount of these investments that are ‘hedged’, or protected, against currency fluctuations. Our analysis has concluded that a more desirable result can be achieved by removing currency-hedged holdings including our US inflation-protected and corporate bond ETFs, and switching them out for similar, non-currency-hedged ETFs.

New funds and their allocations

Removed fund allocations

Updated allocations

AJ Bell Responsible Growth fund

We haven’t made any annual asset allocation changes to the Responsible Growth fund. Because of the way we implement our investment ideas in this fund, we believe it’s already best positioned to navigate the financial markets in 2022. Responsible investing is a new and developing area, and we are always on the lookout for new products and ways to invest in this space.

Important information: The value of your investments can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future performance and some investments need to be held for the long term. Target yields are not guaranteed and can fluctuate.