Did you get a tin of baked beans?

I am not asking about your shopping experience here but I do hope you have been able to get your essential food supplies amid all the supermarket queues and panic buying. What I mean here is did your various multi-asset and other defensive investments do what they said on the tin and protect your capital during this sharp sell-off? Yesterday I undertook some analysis of performance of the funds I have frequently advised to see how they have done in the past year. I decided to focus on performance in the last 12 months rather than the last one month for several reasons. Firstly cautious risk funds that have performance targets, (many do not), normally state that positive returns are expected over a cycle, typically around three years. They don’t claim they will deliver absolute returns over all time periods, notably shorter ones. Secondly I wanted to see the effectiveness of the gains in the previous 11 months in cushioning the subsequent losses. After all 2019 was an excellent year for investors. Good cautious risk funds must be able to capture some of the market gains in the good times in order to insulate investors during subsequent downturns. I wanted to test this theory. However to be fair I did not want to look at three year performance to avoid too much of the upside masking the recent losses.

Here are my findings with all performance data from Trustnet (24/3/20) unless otherwise stated. The returns do not take into account the very sharp rises in shares yesterday. For example the FTSE 100 was up more than 9% and the Dow Jones rose by more than 11% on hopes of a $2 trillion stimulus package in the US. Remember it could prove to be a tin of baked beans bounce.

The figures in brackets are FE fundinfo Risk Scores. FE is Financial Express. These are measures of fund volatility over three years relative to the FTSE 100 index, which is used as a benchmark. The FTSE 100 index’s rating is 100, so a fund with a Risk Score of 45 has experienced 45% of the volatility of the FTSE 100 over the last three years. Bear in mind volatility is not a measure of absolute risk or losses. It just tells us something about the extent of the ups and downs of the fund’s share price. For the technically minded amongst you it is a type of Beta.

For comparison the FTSE 100 Total Return (TR) in the last year was -27.48% (Source: Investing.com). The total return index includes re-invested dividends. In contrast the spot price of gold rose 24.5% since 31/3/19 (Source: Bullionvault.com), showing the benefit of investing in assets that are non-correlated to equities.

Mixed Investments (20-60% Shares)

Axa Global Distribution-7.5%(51)
Artemis Monthly Distribution-14.2%(62)
Investec Cautious Managed-20.0%(57)
Liontrust Sustainable Future Defensive Managed -4.3%(46)

Multi-asset funds vary significantly in their asset allocation and fund management style and there is a wide disparity of returns here. Bear in mind too these funds can in theory invest 60% in equities and so many are still fairly highly exposed to equity market movements. I am happy with the returns of the Axa and Liontrust funds but not those with double digit drawdowns.

Mixed Investments (0-35% Shares)

Fidelity Multi-Asset Income-9.2%(48)
Royal London Sustainable Managed Growth -1.4%(37)
Vanguard LifeStrategy 20% Equity -0.3%(31)

These funds can hold a maximum of 35% in equities but not all do, for example the Vanguard fund. The returns from this and the Royal London Sustainable Managed Growth are good, in relative terms.        

Targeted Absolute Return

BNY Mellon Real Return-7.4%(51)
Argonaut Absolute Return  40.9%(71)
Jupiter Absolute Return-12.7%(30)
Janus Henderson UK Absolute Return 0.7%(38)

These funds had come in for a lot of criticism prior to the crash for their inconsistent returns, their failure to meet their performance targets and capture the upside in a bull market. The Argonaut fund under the management of Barry Norris has had a very bumpy ride and after a period of poor returns he has delivered exceptional performance for investors in the last year.

Direct Property

TM Home Investor1.5%(3)
Time Commercial Long Income4.5%(3)

These very cautious funds invest in physical property rather than the shares of property companies which are much more volatile and like the rest of the equity market have been hit hard in the sell-off. The TM Home Investor invests in residential UK property and the Time Commercial Long Income in long leases and ground rents. Both funds are now closed to new investors and sellers due to uncertainty of valuations not due to liquidity problems and lots of investors wanting to exit.

Volatility Managed

Architas Multi-Asset Blended Intermediate  -9.3%(55)
ASI MyFolio Maerket III Platform-12.2%(62)
HSBC Global Strategy Cautious-1.8%(29)
Santander Atlas Portfolio 4-6.8%(31)

Funds in this sector have volatility targets. These then determine the asset allocation of the fund. Congratulations go to HSBC here for capping losses to less than 2%.

One Month Returns

Having focused on one year returns I want to look at the best performers in each sector to see how they did over the last month. This enables us to see how defensive they were in the sell-off itself without the benefit of the good returns in the preceding 11 months.

Liontrust Sustainable Future Managed-15.4%
Vanguard LifeStrategy 20% Equity-8.0%
Argonaut Absolute Return 9.9%
Time Commercial Long Income 0.3%
HSBC Global Strategy Cautious-9.1%

For comparison the FTSE TR was down 26.7% over the last month.

Some of these returns are less impressive and show that even defensive funds with low equity content don’t escape sharp downturns. However like a bear or other hibernating animal if it puts on enough fat during the summer it will survive the winter. A fund that captures a significant chunk of the upside but never loses money in the sharpest of sell-offs probably does not exist so investors have to accept unless you want to be 100% in cash, investment risk will always be an occupational hazard.

Finally it should be said that differential performance of funds in the same sector in the last year will be down to a combination of the calls of the fund manager in terms of asset allocation, stock selection and use of hedging, spiced with luck. To find out why for example the Liontrust Sustainable Future Defensive Managed did so much better than the Investec Cautious Managed will require further investigation – an examination of the contents of the tins. Similarly fund managers will adopt a variety of measures to protect investors during these difficult times. Some may not do anything significant on the principal that are long term buy and hold investors or they entered the sell-off with a very defensive asset allocation. Others will use cash to add to their best ideas at depressed prices in anticipation of a recovery. The next test for them will be to manage their portfolios in a long term bear market and know when to make changes to benefit from the recovery when it finally comes. For investors the general advice is stay invested if you can.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to invest in any of the funds highlighted, gold or other safe haven assets. You should seek individual advice based on your own financial circumstances before making investment decisions.