Make more of managed funds

With managed funds becoming more complicated, Stewart Smith, investment manager at RSMR, explains how you can understand a fund’s investment philosophy

Make more of managed funds

The term ‘managed funds’, often referred to as multi asset funds, incorporates a wide variety of investment styles and strategies and, from an investor’s perspective, covers a range of risk profiles depending on the (potential) exposure to risk assets.

Overall, managed funds can be split into two categories, risk-orientated and return-orientated, with more recent times seeing a significant increase in the number of funds falling into the former category. The main premise is to have overall asset and geographical allocation together with fund and/or stock selection under the oversight of one fund manager/management team within a capital gains tax efficient structure.

The Investment Association (IA) generally categorises these funds into one of five sectors, four of which are the main managed sectors (Mixed Investment 0%-35% Shares, 20%-60% Shares, 40%-85% Shares and Flexible Investment) with the classifications determined by a maximum level of exposure to equities and a minimum level of exposure to any combination of fixed income and cash.

The other IA sector is Unclassified and there are an increasing number of funds, particularly risk-targeted funds, being categorised in this sector, as their investment strategies are primarily determined by their risk targets rather than asset allocation parameters.

Risk

Risk-orientated funds within ranges such as Old Mutual Spectrum, Santander Atlas, F&C Lifestyle, Legal & General Multi Index and Premier Liberation, typically have a long-term, annualised volatility range that they aim to remain within – often linked to a third party risk profiling tool – but with the understanding that they may fall outside of those parameters over the short-term.

This approach allows potentially significant flexibility in terms of asset allocation in order to both remain within those parameters and generate attractive returns. Return-orientated funds in ranges like F&C Navigator, Henderson MultiManager and Jupiter Merlin or single funds such as Ruffer Total Return, Troy Trojan and Miton Cautious Multi Asset, may or may not have a particular target return or target income but their volatility levels will vary over time and there are usually no requirements to stay within a particular risk profile.

Some of these funds have been risk-profiled by third parties but, again, there are no requirements for funds to stay within those risk profiles.

In addition to the choice of risk-orientated and return-orientated funds, investors must pay close attention to the underlying investment strategies. The debate of ‘active versus passive’ is becoming consigned to history with many funds in the managed space in particular investing using both investment types, although a fund’s investment philosophy, strategy and style will determine the overall approach.

Even though the underlying investments may be active and / or passive, asset allocation flexibility can vary significantly between funds. For example, the Jupiter Merlin funds look to take very active, high conviction positions, moving quite aggressively in and out of asset classes; funds like the F&C Lifestyle funds take relatively small active asset allocation decisions against their central benchmarks and the Premier Liberation funds look to remain as close to their benchmark weightings as possible at all times.

The type of underlying investments can also be very different. A number of funds would fall into the fund of funds / multimanager category but there are an increasing number of directly invested funds or funds combining direct investments with third party funds.

With the current global economic uncertainty and concerns about valuations across asset classes combined with the large number of managed fund options available, it is as important as ever to fully understand a fund’s investment philosophy, style, strategy and risk characteristics in order to select an appropriate fund.

Managed funds are generally becoming more sophisticated, investing in a wider range of asset classes, using more complex investment instruments whilst aiming to be more customer-focused (e.g. risk targeted, absolute return, target income etc.), so strong qualitative research is required, supported by evidence that the investment strategy being used has been successful in meeting the stated objectives.

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