Balanced AFI plays it safe as houses

The November rebalancing saw a high fund turnover in the Balanced Advisor Fund Index, with a sharp cut in equity exposure and an increase in structured products and property funds.

Last week’s Adviser Fund Index feature looked at the ways the panellists tried to reduce risk in the Aggressive AFI, during the rebalancing on November 1. The 18-strong panel increased asset class diversification and reduced its exposure to equities in the index, indicating a cautious outlook on world markets.

Similar measures were taken in the Balanced AFI, with an even sharper fall in equity exposure. The total allocation to shares declined by five percentage points – to 66% – including a four percentage point reduction in the allocation to British shares. There were also small falls in the weightings to Asia Pacific and European equities.

As with the Aggressive index, these reductions were used to fund increased exposure to North American and international shares. However, the largest allocation rise was in structured products, up from 0.1% to 1.35%. This was closely followed by property, which increased by 1.2 percentage points to 7.6%. Two specialist property funds have been added to the index – Fidelity Global Property and Skandia Investment Management Global Property Securities.

The Fidelity fund was made available as an Oeic in September, following the successful launch of an equivalent Sicav at the start of the year. The portfolio is run by Steve Buller with the aim of holding 50-70 liquid property securities, across a range of sectors. The £230m Skandia portfolio is run in conjunction with LaSalle Investment Management, a division of the American property specialist Jones Lang LaSalle. The fund held 53% of its assets in America at the end of October, followed by 13% in Europe and 13% in Britain.

The AFI’s newest panellist, David Wynn, investment director at Bentley Jennison Financial Management, is positive on property but prefers investing in bricks and mortar funds for diversification. Wynn has allocated 20% of his Balanced AFI portfolio to New Star’s £1.5bn Property unit trust, his largest individual position. The fund, launched in 1999, is run by Roger Dossett and Stephen Whittaker.

Its largest investments on October 31 were in Windsor Office Park, Whitehall Riverside in Leeds and Plough Place, based in London. Bentley Jennison also uses property to reduce volatility in its balanced client portfolios, with the aim of keeping annualised standard deviations between 6% and 12%.

Despite his “chunky bet” on property, Wynn is upbeat on the long-term outlook for equity markets. He says: “We prefer equities over bonds and property. The global economic environment is robust and this supports all asset classes. There are strong corporate earnings and balance sheets, with historically low interest rates.

“Risks such as global terrorism remain, but the financial markets are becoming more thick-skinned in that regard. There are also concerns over inflation in the US and the UK, but we do not think it is picking up.”

Wynn favours property over bonds, but his 20% fixed income allocation is marginally overweight the index. He has positions in Stephen Snowden’s £750m Old Mutual Corporate Bond fund and Baillie Gifford High Yield Bond, run by Kenneth Barker and Ben Thompson.

The £50m Baillie Gifford portfolio, a new addition to the AFI, is able to use derivatives for investment and hedging purposes. Wynn says: “We prefer corporate and high-yield bonds to gilts in a strong economic environment – managers are able to find more anomalies in the high-yield arena. Both funds have strong stock selection and good risk-adjusted returns.”

Bentley Jennison’s 40% British equity allocation is divided evenly between five funds, with Artemis Income and Invesco Perpetual Income designed to provide “ballast”. Meanwhile, the Schroder UK Alpha Plus, Merrill Lynch UK Dynamic and Old Mutual UK Select Mid Cap funds have been selected to add “spice” to the selection, Wynn says. The firm’s 20% allocation to international equities comes from New Star Global Financials, run by Guy be Blonay, and Artemis European Growth.

Fund turnover in the Balanced AFI was high during the November rebalancing. The panellists removed 17 funds and brought in 26 new holdings, increasing the total funds to 112, the most of any index. The most significant departure, in terms of weighting, was T Bailey’s £130m Growth portfolio.

However, the most common selection to leave the index was JP Morgan’s Japan fund, chosen by three panellists at the May rebalancing. JP Morgan and First State both lost three funds overall, although JP Morgan Europe Dynamic (ex UK), run by Ajay Gambhir and John Baker, joins the AFI after its selection by two panellists. The most popular new arrival is Schroder European Alpha Plus, selected by four advisers. The fund is managed by Leon Howard-Spink, who joined the firm from Jupiter last year.

As at the end of September, the £250m portfolio was underweight financials and overweight industrials, with its largest holdings in UBS, Anglo Irish Bank and ING. Aberdeen Asia Pacific was also selected by four advisers, although its total weighting is lower.

The Investment Management Association’s UK All Companies sector remains the most popular in the Balanced AFI, with 17 funds and a weighting of just over 20%. This is followed by UK Equity Income on 18%, and Specialist on 11%.

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

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