As equity markets struggle a more balanced approach could pay off
Thursday 16 Jun 2022 Author: Ian Conway

With stock markets wrestling with the twin concerns of too little growth and too much inflation, cautious investors who want to spread their risk might want to look at multi-asset funds.

Rather than just owning shares, these funds own a mixture of equities (another term for stocks and shares), bonds, currencies, and alternative assets such as property and infrastructure.

As such they take the guesswork out of spreading your money across different asset classes and offer an all-in-one solution.


Over the last five years, multi-asset funds have lagged global stock markets which have been driven mainly by growth companies.

However, during periods of market stress such as the onset of the Covid pandemic and more recently the invasion of Ukraine, multi-asset funds have offered a degree of protection.

Given the growing uncertainty over the strength of the world economy in the face of central bank tightening, it makes sense for cautious investors to consider spreading their money across different asset classes.

US asset management firm Vanguard offers a range of ‘LifeStrategy’ funds with varying allocations to shares starting at 20% for investors with the lowest risk tolerance rising to 40%, 60%, 80% and 100%. The balance is held in bonds.

Similarly, there are plenty of funds offering a mixed investment strategy with 0% to 35% shares, 20% to 60% shares or 40% to 85% shares.

According to The Investment Association, there is over £150 billion invested in these types of funds, with the majority (£86 billion) invested in the mixed 40% to 85% category and most of the rest (£54 billion) invested in the mixed 20% to 60% category.





Two of the best-performing funds in the mixed 20% to 60% category are the Royal London Sustainable Diversified Trust (B844WJ6) which has returned 34.4% over the last five years and the VT Momentum Diversified Income Fund (B7JTF56) which has returned 25.9% against 12.2% for the UT Mixed Investment 20% to 60% Shares Retail sector index.



The Royal London fund invests with a three to five-year time horizon, mainly in UK assets which are deemed to make a positive contribution to society.

As co-manager Sebastien Beguelin explains, the decision on which assets to buy is driven by detailed fundamental analysis of individual companies rather than a top-down macro view of the world.

‘We can’t claim any expertise in asset allocation, we’re stock-pickers so we take a bottom-up approach. We look for innovative companies which are improving things for society. It’s a disciplined approach which has delivered over more than a decade,’ says Beguelin.

Once a company has passed muster, the equity and credit teams at Royal London decide whether to invest in the shares or corporate bonds.

‘We tend to buy more industrial stocks than consumer stocks,’ says Beguelin. ‘Obvious examples are firms which help other companies by reducing their energy consumption.’

As well as industrials, the fund has a heavy weighting towards technology and healthcare stocks, and very little towards consumer, utility, basic material or energy companies.

Asked whether the rally in oil prices might tempt the Royal London team to increase their energy exposure, Beguelin was unequivocal: ‘We aren’t buying oil producers, we’re long-term investors and the sector is fundamentally a “sell”.’


The managers of the VT Momentum fund also take a bottom-up approach to building their mixed-asset portfolio, this time with a strong focus on value.

In contrast to Royal London the team doesn’t invest directly in credit, preferring to own a mix of corporate and government bond funds instead.

Similarly, exposure to overseas equities and alternative assets such as property and infrastructure is through funds, which allows the team to pick who they deem to be the best managers in each sector and focus their efforts on picking UK stocks.

‘Investing through funds isn’t risk-free but it’s a lot less risky than trying to pick individual foreign stocks or high-yield bonds,’ explains lead manager Richard Parfect.

Alternative – or specialist – assets make up nearly a third of the Momentum fund and are primarily chosen for income and are typically inflation-linked.

‘These really came into their own during the pandemic when UK companies went on strike and stopped paying dividends,’ says Parfect.

Interestingly, two of the fund’s top five UK holdings, M&G (MNG) and OSB (OSB), have both announced share buybacks of around 10% of their market caps.

While this isn’t much help on the income front, it does demonstrate the managers’ focus on value and in particular the sustainability of income.

‘We look for companies which are really well-capitalised,’ says co-manager Mark Wright. ‘The fact they’ve chosen to buy back their shares in this instance means they should generate capital gains over and above the market.’


Also in the multi-asset space, April marked the fifth anniversary of the launch of five funds by investment platform AJ Bell (AJB)

The funds, which range from Cautious to Adventurous, offer a varying mix of shares, bonds and other assets depending on investors’ risk appetite. Each portfolio contains a range of exchange-traded funds.

All five of the AJ Bell funds rank in the top quartile of performance when looking at the five-year data to 3 June 2022, although it’s important to note they didn’t stay in the top quartile for the entire five-year period.

‘Looking back on the past five years, the portfolios have clearly had to contend with a wide array of different economic, macro, political and social events, so it is heartening to see them come through so strongly,’ says Kevin Doran, chief investment officer.

While the funds have had drawdowns as the market has fallen, in the three big market declines during the past five years – the China trade war in late 2018, the pandemic slide in early 2020 and the invasion of Ukraine earlier this year – they have typically outperformed.

‘This performance isn’t necessarily by accident given how we have designed our asset allocation approach. We are unashamedly long-term investors, who believe in the power of diversification, keeping costs as low as possible and trying not to be too clever,’ says Doran.

DISCLAIMER: AJ Bell is the owner and publisher of Shares. The article’s author (Ian Conway) and editor (Daniel Coatsworth) own shares in AJ Bell. Past performance is not a guide to future performance and some investments need to be held for the long term. The value of your investments can go down as well as up and you may get back less than you originally invested. AJ Bell and Shares do not offer advice. If you are unsure about the risks of investing, please consult a suitably qualified financial adviser.

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