Asset allocation conundrums have traditionally revolved around striking a balance between bond and equity exposures, premised on a view around the direction of the economic and market cycle at any given time.
That is based on the premise that bonds and equities move in a way that is inversely correlated, that is, move in opposite directions. If market conditions are benign, equity valuations would be expected to move upwards, and bond prices downwards, and when markets are turbulent, bond prices rise, and equities fall.
The persistent rise in bond prices that can be traced back 40 years to the start of the 1980s when central banks began to, finally, tame the very high inflation that became endemic in the 1970s, and continued until 2021, caused many market participants to ponder if more ingredients were needed in a portfolio to ensure diversification.
This caused businesses to launch products that had the aim of “delivering positive returns in all market conditions” by investing in a very broad range of assets and asset classes, and effectively replace some of the bond exposure in portfolios.
Among the very first such products to launch into the UK market was Standard Life, which came to market in 2013, and at one time had assets under management of more than £20bn, though the latest data from FE Analytics now places the AUM of the fund at £2.3bn, indicating AUM dropped by close to 90 per cent in four years.
The performance of the fund has been quite weak, losing money over the past year, and even on a five-year basis the fund has returned just 3 per cent, during a period of a rousing bull market. It lost money in two of the calendar years between 2018 and 2021. It suffered net outflows of more than £700m in 2021.
Over the past five years, the Investment Association Total Return sector has returned 8 per cent.
The sector as a whole had outflows of £3bn during the year.
A familiar refrain from advocates for the sector is that the generally benign conditions in financial markets in the decade after the financial crisis meant that volatility was low, and such funds are designed for a climate when turbulence is high.
Bertie Dannatt, who runs an absolute return strategy at Ruffer, compares markets in the decade after the financial crisis to "water running up a beach. There was so much liquidity from central banks in that time that all asset prices, bonds and equities rose. All you can do in that sort of market is be prepared ahead of time for the risks that are out there".
He adds: "We don’t believe it is possible to time markets, but one can have certain investments that can offer protection against the risks that are there, and we felt for a long time that the major risk was inflation, and we feel that now as well. But for the decade or so when it didn’t happen, we had those hedges in place, including owning gold. What has changed is that in the past, that ballast in portfolios came from bonds, which provided an income, but that is not the case anymore.”
