All three indices hold several of the same funds, including the BlackRock UK Absolute Alpha and the M&G Global Basics – which is not surprising as they are among the top funds in the industry.
As of last season’s rebalancing, there are several funds that appear across all three Adviser Fund Index (AFI) portfolios: Cautious, Balanced and Aggressive. Although the AFI is split into three distinct indices, some funds are clearly seen as appropriate to all. So which are they and why are they chosen so broadly?
The BlackRock UK Absolute Alpha, for example, occurs nine times in the Cautious AFI, six times in the Balanced and five times in the Aggressive. With markets having become increasingly volatile in the past year, panellists have used absolute return type funds to help offer some protection. The £1.43 billion BlackRock UK Absolute Alpha fund, in particular, has seen a lot of inflows.
There are other funds, however, that occur across the AFI in all three indices that are not absolute return vehicles. These include the £3.45 billion M&G Global Basics fund, which occurs seven times in the Aggressive portfolio, five times in the Balanced and twice in the Cautious. The fund, which has been managed by Graham French since its launch in 2002, is first quartile over both one and thee years to August 25, according to Morningstar. Over three years, it produced a return of 56.14% compared with an Investment Management Assocaition (IMA) Global Growth sector average of 17.79%. Over one year, it produced a return of 7.9% compared with a sector average fall of 6.12%.
The £1.69 billion First State Asia Pacific leaders fund also occurs in all three AFIs. It is listed six times in both the Aggressive and Balanced indices, and twice in the Cautious. Over one and three years to August 25, the fund was first quartile in the IMA Asia Pacific excluding Japan sector, according to Morningstar. Over one year, it produced a return of 7.18% compared with a sector fall of 8.15%.
Ben Willis, the head of research at Whitechurch Securities, has not chosen any funds to appear in all three of his AFI portfolios. He does have funds that cross over two, however.
“There’s more commonality between the Cautious and the Balanced and the Balanced and the Aggressive,” Willis explains. “The Aggressive has a lot of satellite areas you wouldn’t have in the Cautious. You might have some core funds, but sometimes they might not fit in the Aggressive portfolios,” he adds.
“Also, you might favour a certain style, such as value [investing], across the indices. In the Cautious portfolio you’re looking for a lot more fixed income exposure. That asset mix is whittled down in the Balanced, and in the Aggressive there is no exposure to it.”
With regard to the BlackRock UK Absolute Alpha fund, Willis says it is not surprising it appears across all three AFI indices. But he only holds the fund in the Cautious AFI. “It’s not surprising because of all the volatility we’re seeing,” he says. “But we’re quite aggressive in our stance.”
Over one year to August 25, the BlackRock UK Absolute Alpha fund was ranked first out of seven funds in the IMA Absolute Return sector, according to Morningstar. It produced a return of 10.23% compared with a sector average of 6.16%.
Like Willis, Jonathan Wallis, the head of retail fund research at Allenbridge Group, has not chosen any funds to hold across all three of his AFI portfolios. His fund choices for the Aggressive AFI are far more equity-based than his Balanced or Cautious portfolios.
“We have tried to define them from the risk of the fund perspective, as well as the asset allocation,” says Wallis. “I can see why some of the [absolute return] funds would be attractive at the moment, but we don’t do strategic tactical moves within the funds we put forward for the index. We tend to take the broad long-term asset allocation we think suitable and populate it with the funds within that we think are best.”
Funds that Wallis holds in more than one of his AFI portfolios include the M&G UK Select and Fidelity South East Asia funds, which he holds in both the Balanced and Aggressive AFIs.
In his Cautious and Balanced AFI portfolios, Wallis holds both the Neptune Income and Henderson UK Equity Income funds. He says he is unlikely to hold any funds across all three AFIs at the next rebalancing in November.
“We tend to go for the more aggressive funds in the adventurous portfolio and they wouldn’t be suitable for the Cautious,” he explains.
Likewise, Darius McDermott, the managing director of Chelsea Financial Services, does not hold any funds in all three of his AFI portfolios. He tries not to do that he says. If he were to include one fund in all three AFIs, he says it would be Neil Woodford’s Invesco Perpetual High Income fund.
Over one and three years to August 25 the fund is first quartile, according to Morningstar. Over three years it produced a return 31.49%, compared with an average IMA UK Equity Income sector return of 6.96%.
“We try to mix it about,” McDermott says. “We hold the Invesco Perpetual High Income fund in the Aggressive and Cautious AFIs, and we use the Neptune Income fund in the Balanced.”
Other funds McDermott holds in more than one portfolio include the First State Pacific Leaders and BlackRock UK Absolute Alpha funds.
“I’m not surprised they are in the list,” he says, “they are the cream of the cream, the top funds in the industry.”
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).