Each of our four Multi-Asset funds offers a diversified portfolio in one easy-to-buy investment designed to meet a broad risk profile – from cautious through to adventurous. The funds are actively managed by Charles Stanley's investment team, which means ongoing portfolio management is done for you. Investors do, however, need to be careful in selecting the fund(s) appropriate for their needs.
Successful investing involves diversification and controlling risk. Not having all your eggs in one basket helps reduce risk and means you are not reliant on specific investments or areas performing well. To this end we have been pleased with the way in which the funds have coped with the market volatility seen in the spring of this year and the performance during the recovery that followed.
Having entered 2020 with a relatively cautious stance, we had some protection from the rapid falls seen in markets, and in the subsequent recovery, the funds benefitted from our preference for overseas markets, notably the US, versus the UK. We have also reaped the rewards for maintaining exposure to government bonds, notably US Treasuries, where prices have continued to grind higher. Thus far we have also been rewarded from holding our nerve rather than taking profits along the way, and we are pleased to report strong year-to-date returns relative to the fund’s respective peer groups.
Table: Year to date and discrete annual performance of the Charles Stanley Multi Asset Funds and respective peer group sectors.
Having largely maintained the status quo in the portfolio for much of the year, we have recently taken the opportunity to make some changes during a quieter period for markets.
We have sold out of BlackRock Asia Special Situations Fund following the announcement of the departure of lead manager Andrew Swan. The fund has performed very well for us, but our Collectives Research Team held Mr Swan in high regard and now believe there are better alternatives in the sector. We have chosen to switch into Stewart Asia Pacific Sustainability Fund, which aims to invest in companies that are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.
Compared to the BlackRock fund there is a regional overweight to India rather than China. Given the strength of Chinese stock markets over the past year, particularly among some of the dominant tech stocks, this would have been a substantial detractor from performance, but to the manager’s credit the effect of stock selection has largely offset this. Pairing this fund with Schroders Asian Total Return investment trust gives us attractive and well-rounded exposure to the region.
Our exposure to US equities has been largely accounted for by low-cost tracker funds, which has been a sound strategy. Within the broader US indices, the mega-cap technology stocks have driven the outperformance of the US over other world markets and we have successfully tapped into this with passive investments following the S&P 500, Nasdaq 100 and other indices.
While technology investments used to be considered higher risk than the more traditional defensive sectors, this crisis has flipped that narrative around as people sought safety in companies with flexible digital business models less likely to be impacted by the Covid-19 pandemic and restrictions placed on populations. This has pushed many of these shares to record prices and valuations whilst considerable uncertainty remains as to how the world will exit this pandemic. The structural growth story behind technology investments remains robust but the extra concentration amongst a handful of stocks does add to the risk of portfolios in aggregate. As at 28th September 2020, the top five S&P 500 companies (Apple 6.8%, Amazon 4.8%, Alphabet 3.1%, Microsoft 5.7%, Facebook 2.2%) combined are worth $6.52 trillion (around 23% of the S&P500) which is equivalent to the bottom 367 companies combined.
Chart: Composition of the US S&P 500
Given the increasingly top heavy nature of the US (and world) equity markets, we have decided to diversify by switching some of our passive US exposure into Baillie Gifford Positive Change Fund. Whilst predominantly invested in US equities, this is a global high conviction portfolio with relatively little overlap with the S&P 500 or Nasdaq 100 indices. The fund aims to contribute toward a more sustainable and inclusive world while generating strong returns by investing in four ‘impact themes’: Social inclusion and education, environment and resource needs, healthcare and quality of life and ‘base of the pyramid’ (companies addressing the basic needs of the global poorest). There is a focus on what the managers consider to be exceptional growth businesses. These tend to be expensive, but some are likely to drive the next generation of change across the globe and could therefore grow into their valuations over time.
Turning to the element of our portfolios invested in bonds – which is of more significance for our lower risk strategies – we are mindful of how expensive government bonds have become. Yields have plunged new depths and we have been left asking how much protection these assets now offer against further volatility in the stock market and, on the flipside, how much risk they carry with respect to any higher-than-expected inflation. Year-to-date we have made a return of over 10% on our holding in US Treasuries and whilst we do not expect yields to rise in a meaningful way over the short term, the risk-reward trade-off is less favourable from current levels.
Chart: US 10-Year Treasury Yield
Consequently, we have reassessed all of our fixed income positions and decided to take three main actions: Take some profits from our longer dated bonds (which are the most sensitive to changing inflation expectations), sell our now negative yielding shorter duration government bond exposure, and top up our actively managed Emerging Market Debt fund which has a flexible mandate capable of adding value in these unusual markets.
In addition, the proceeds of some of the sovereign bond sales have been reinvested in shorter dated corporate bonds with the re-inclusion of the AXA Sterling Credit Short Duration Bond Fund, which we have held previously. This fund has an average credit rating of A- with a yield to maturity of 1.4%. While corporate credit investments would almost certainly be more volatile than their sovereign bond equivalents through another period of market stress, we think that the additional yield offered compensates for this and that any volatility would be likely be short lived and is unlikely to result in significant default rates.
Finally, we continue to favour infrastructure and have decided to bolster our allocation to this asset class with the addition of the Sequoia Economic Infrastructure trust. The investment trust manages a diversified portfolio of economic infrastructure debt investments from companies and projects operating in developed countries. It also has low sensitivity to interest rates and complements our existing positions in the area.
The annual charges on our Multi Asset Fund range were substantially reduced on 1st January 2020 from 0.75% a year to 0.30%.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Charles Stanley Multi Asset funds – update
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