A recent survey of financial advisors conducted by Schroders found that the three fund sectors that they are most likely to recommend for 2016 are: Mixed Investment 20%-60% Shares, UK Equity Income and UK All Companies. Other parts of the market like Strategic Bond funds that were popular last year are no longer on their buy list.
It is an interesting selection as the Mixed Investment 20%-60% Shares sector has only generated an average 12-month return of 0.6%, with the best performing constituents up just 6.6%. The most likely explanation is that the multi-asset nature of these products allows them to reduce risk by diversifying across different asset classes, which is a valuable characteristic if you are expecting a difficult 2016.
You might be surprised to learn that the top performing fund in the sector over the last year was Kames Ethical Cautious Managed. This avoids stocks that fail the company’s ethical screen and may have benefited by not investing in some of the large miners and oil producers that have suffered as a result of the fall in commodity prices.
It has been an even quieter year for the Hawksmoor Vanbrugh fund with a return of just 1.2%. The team behind it have put together a portfolio of 44 open and closed-ended funds that they actively manage to take advantage of market opportunities. Their monthly commentaries are always worth reading even though they haven’t been able to make much headway in 2015.
Ruffer Total Return is another interesting fund that has fared even worse as the annual return of 0.5% puts it one away from the bottom of the sector. The managers aim to generate low volatility, positive returns and have built up an excellent long-term track record with a gain of almost 300% since it was launched in September 2000. It is an interesting portfolio with 39% in various index-linked gilts and a further 18% invested in Japanese equities.
The second sector favoured by advisors is UK Equity Income and it too has had a quiet year with an average return of 4.5%. Many people use these funds to form the core of their portfolios and if they were able to pick one of the top performers like CF Woodford Equity Income they will have enjoyed a 12-month gain of between 10% and 20%.
Lots of UK Equity Income funds pay a decent yield of more than 4%, which is pretty attractive in the current low interest rate environment. The problem is that a large number of companies have increased the proportion of their profits that they distribute and might be at risk of cutting their dividend, so the managers need to be careful about where they invest.
It is no surprise that Strategic Bond funds have fallen in popularity as higher interest rates are likely to force bond prices lower right across the board. The various fixed income sectors have seen quite large withdrawals for much of the year as investors re-position their portfolios ready for 2016.