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Why 2017 could be the year to diversify with a single buy

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
20/12/2016

Diversification will be key for investors in 2017 and one way to diversify is to buy a multi-manager, multi-asset ‘fund of funds’, writes Darius McDermott, managing director of Chelsea Financial Services.

Uncertainty is certainly on the cards for 2017. As always in the lead up to Christmas, I’m being asked for my top tips. In previous years, I’ve expressed strong views around one asset class or another, or a particular region. But with Brexit, Trump and European elections to contend with, it’s hard to confidently recommend any of the ‘traditional’ choices.

There will surely be some surprise successes—just as this year the UK’s smaller companies look likely to finish up around 10%, despite dire predictions for their health post-Brexit—but I’m reluctant to offer investors ‘best guesses’. My main suggestion for 2017, therefore, has been to diversify.

I recently spoke about the idea of ‘going niche’ in industries like infrastructure or insurance, or considering bonds that were either short duration or high yield, to lower the risk presented by potential interest rate rises and inflation.

Another diversification strategy that many investors may not be aware of is to buy a multi-manager, multi-asset ‘fund of funds’. This means that instead of buying a fund that invests directly in equities or bonds, for example, you buy a fund that buys other funds.

The obvious benefit is that you can gain access to a broad portfolio of assets with a single buy. The other advantage is that if the underlying funds invest in a range of assets, the fund of funds’ managers should have the flexibility to dial up or down dial exposure in response to the market environment.

Think about it in the context of the world over the past year. If you follow financial news and look after your own investments, you will know there’s been quite a bit of volatility in markets. With the outlook for various assets quite divisive depending on election and referendum outcomes, the amateur investor has had a lot to keep up with. Is gold up or down this week? What’s happening with US bond yields? Are all emerging markets forecast to struggle under Trump, or are some predicted to shine? Will sterling continue to fall in 2017?

In a good fund of funds, the manager/s can make investment decisions for you. It’s their job to keep on top of these kind of tricky questions. If you’re a smaller scale investor, funds of funds can also make it possible for you to invest more widely than you otherwise could.

Higher fees

It’s important to know fees on these funds can be higher than other funds’ fees, because of the costs involved in trading the underlying funds. However, as always, the key figure to look at is total returns net of fees, which will give you a good guide as to how much value any particular fund has added to investors’ returns over time. And remember, these types of funds aren’t necessarily about chasing the highest possible returns – the good ones usually aim to protect your money and offer reasonable growth and/or income. Their draw card is reducing risk by diversification.

One fund I really like for this purpose is Schroder MM Diversity, which sits in the Investment Association’s Mixed Investment 20%–60% Shares sector (meaning it can hold up to 60% in equities). Its default position, however, is one third each in equities, fixed interest/cash, and alternative investments. Alternatives could include assets like property, commodities or possibly hedge funds – so it does also offer access to some more ‘niche’ investments. The fund has a growth focus, but the managers will vary asset weightings quite a bit as needed at different times – for example, they won’t hesitate to hold more cash than usual if they don’t see good value or, conversely, to increase equity holdings when growth opportunities arise.

Another excellent option that often seems to fly under the radar is the F&C MM Navigator Distribution. The managers invest in around 25 to 35 underlying funds, with a selection process that epitomises a lower risk approach. They concentrate on finding the best funds (rather than using asset allocation to drive returns) and they pay a lot of attention to which funds they combine to create a portfolio that works holistically. The fund has an income mandate and an annual historic yield of 4.6%2, which is pretty attractive in the current environment. Total returns have also beaten the benchmark every calendar year bar one since launch.


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