The neutral mixed fund portfolio consisting of 50 percent equities and 50 percent bonds remains popular despite year-to-date losses.
The Morningstar EUR Moderate Allocation - Global category lost 6.8 percent over the first four months of this year, while the Morningstar EU Moderate Global Target Allocation index lost some 6.6 percent of its value in euros. As at the end of Apri, the broad MSCI World index had lost 6.3 percent, while the Bloomberg Global Aggregate index was 4.4 percent into the red. In other words, the correlation between both asset classes was positive.
The neutral 50/50 portfolio has worked superbly over the past two decades because of the negative correlation between equities and bonds; when one rose, the other fell. But what many investors do not realise or have forgotten is that this correlation changes over time. During the 1970s and 1980s, up to the mid-1990s, the correlation between the two asset classes was positive, averaging around 0.3. Since the early 2000s, the correlation has averaged -0.4 between US large-cap stocks and the 10-year government bond.
Negative correlation good for mixed funds
It is generally accepted that a rise in policy rates puts pressure on bond prices. Bond yields rise with the policy rate and this is offset by a fall in bond prices. The impact on equities, on the other hand, varies and is largely a trade-off between expected corporate profits and higher interest rates. As long as corporate profits rise sufficiently, even with rising interest rates the negative correlation between equities and bonds should hold, which is good for mixed funds.
However, when faced with a downturn in corporate earnings, for example during a recession, we may find ourselves in a situation where investors choose to sell both asset classes. Moreover, if inflation remains high, there is a risk that central banks will be less able to intervene in a severe stock market correction as in the past.
In a recent interview with Morningstar, Jim Grant, founder and editor of Grant’s Interest Rate Observer, called rising interest rates the “kryptonite” of financial assets.
Alternatives did well
Bonds are not easy to replace in a diversified portfolio. While professional investors often respond to current challenges with more tactical allocations, this does not stop some from looking for additional building blocks to their portfolio. Private markets are popular, but also the more traditional alternative asset classes are back on the menu. The Bloomberg Commodity index, a gauge of broad commodity prices, stands to gain 41 percent in euro terms by the end of April, while gold also held its ground. Inflation-linked bonds have fared much better than government bonds, with Morningstar’s Eurozone Treasury Inflation-Linked and US TIPS indices achieving positive euro returns of 0.6 percent and 2.6 percent respectively so far this year.
Allocation funds remain popular
The 50/50 portfolio has been buried many times and yet it always managed to hold its own. Allocation funds saw estimated inflows of around 22 billion euro in the first three months of 2022 and were the most popular category among European investors after equities. Most popular this year are neutral allocation strategies and the Morningstar category EUR Moderate Allocation - Global is the allocation category with the most assets under management at the end of last quarter, at around 15 percent, followed by EUR Flexible Allocation - Global and EUR Cautious Allocation - Global with market shares of 13.2 and 11.4 percent respectively.
Top 5
For this week’s top five, we look at mutual funds in the Morningstar Category EUR Moderate Allocation - Global whose distribution fee-free share class is available in the Netherlands. These five funds have shown the best performance based on returns over the first four months of 2022.
Ruffer Total Return International
In first place we find Ruffer Total Return International which receives a Bronze rating from Morningstar analysts. Investors in this fund benefit from a clear and consistent focus on capital preservation delivered by a well-equipped, experienced and collegial investment team.
Since its launch in July 2021, Jonathan Ruffer and CIO Henry Maxey have been the key decision makers for this strategy while portfolio construction is carried out by fund managers Jacques Hirsch and Alex Lennard. Ruffer’s broad investment team consists of 30 analysts, an economist and more than 45 managers and is characterised by their high degree of collegiality.
The approach is top-down and begins with a thorough analysis of the global macro environment, opportunities and associated risks. The building blocks of the portfolio are largely conventional asset classes such as equities, government bonds, cash and commodities. In constructing the portfolio, the team strives to find a balance between so-called growth and protection assets. Currently, the strategy is relatively defensive with around 60 percent in assets such as inflation-linked bonds and gold as protection against inflation. The team also uses derivatives such as put options on equities and credit default swaps. In November 2020, Ruffer added bitcoin as an additional diversifier, but sold its position in April 2021.
BL-Global 50
In second place, we find BL-Global 50 whose objective is to generate positive returns over the medium term while limiting volatility by combining equities (weighted between 35 percent and 65 percent), government bonds, cash and gold. The fund was launched in October 1993 and is managed by Joël Reuland, Fund Manager at Banque de Luxembourg. Besides this strategy, Reuland also manages the BL Global 30 and 75 and BL Sustainable Horizon strategies. At the end of 2021, the fund held 52.1 percent of its assets in equities, 19 percent in bonds, 7.6 percent in cash and no less than 21.3 percent in precious metals. Within the equity segment, the fund is overweight in the consumer and healthcare sectors. It also has relatively low exposure to energy, real estate and the financial sector.
Top 5 based on asset class for the Netherlands:
Top 5 based on asset class for Belgium:
Thomas De fauw is a manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.
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