Given rising markets, it is only natural that conservative multi-asset funds have been tempted to up their equity allocation in recent months to get a piece of the action.
Such a strategy is not without risks and it is also not adopted by every fund manager.
Trevor Greetham, head of multi-asset at Royal London Asset Management, says for his portfolios, including the Royal London GMAP Defensive fund, he had tended to be ‘quite significantly underweight bonds to buy equities’.
However, he is currently flat neutral (neither underweight nor overweight). This is partly driven by Brexit negotiations causing uncertainty for government bonds.
‘Bond yields could keep rising, but if the economy goes into a recession they will fall, so it feels quite finely balanced,’ he says. ‘I think for UK funds the bigger issue around gilts is Brexit.
‘It feels like the pound is going to go up or down depending on the outcome and so will bonds, because gilt yields will go up if we stay in the EU. So there is huge risk around sterling and huge risk around gilts.
‘It is all about trying to hedge your bets for Brexit risk and that is another reason not to take a heroic view on gilts particularly.’
Greetham says within the GMAP fund range, which is actively managed, there is a lot of flexibility over asset allocation. This means he can add or take away from equity exposure depending on market conditions.
‘The biggest risk is that equities and bonds are being driven by the same things,’ she says. ‘You have a policy backdrop, which is being supportive for both.
‘You saw it earlier this year that the reason equity markets initially sold off was because bond yields were creeping higher and no one really knows what that means.’
Instead of buying fixed income, the Invesco Perpetual Global Targeted Income fund bought into currencies with the US dollar and the Japanese yen over the past 18 months to act as protection plays.
‘What can be defensive in this environment? I think if rates are moving because policy is changing then currency also feeds into that. And if you can access that, some currencies can be very useful. For these very reasons the Japanese yen and the US dollar can be very helpful as defensive exposure in the fund.’
Frank Talbot, Citywire head of investment research
It has not been the time for defensive strategies. Equities have done so well and conservative/absolute return strategies, by their very nature, are predominantly invested in fixed income. There has been a temptation for conservative managers to run high equity weightings. But while this would have benefited investors, this kind of style drift is generally unwelcome.
We have seen that kind of pressure on the large multi-strategy funds and the outflows have been covered at length. Perhaps the wider conversation is about the fact risks in fixed income are forcing investors to up their equity weightings.
That said there are still defensive portfolios delivering compelling returns. One of the best-performing defensive funds to be found in Citywire’s Mixed Assets - Absolute Return sector is the Troy Trojan O Income fund, managed by Sebastian Lyon.
This has been a staple in investors’ portfolios since before the credit crisis. The early move into US and UK index-linked bonds, which account for 39% of the fund, is just the latest in a number of shrewd long-term bets Lyon and his team have placed.
It is extremely risk averse and is among the least volatile funds in the UK. Since launch in 2001, it has only had one calendar year of negative returns and that was not during the credit crisis.