Do balanced funds need to change?
Changing market conditions may mean New Zealand’s investing population must alter its definition of what a balanced fund looks like, it has been claimed.
Thursday, March 10th 2016, 6:00AM 
4 Comments
by Susan Edmunds
John Berry
Balanced funds have traditionally combined equities, fixed income and sometimes a cash component to provide safety as well as income and moderate growth.
But James Ring, of Quay St Asset Management, said it was worth asking whether the traditional balanced fund structure would look the same in future as it had until now.
"Is it going to work over the next five years?”
He said very buoyant equity markets combined with low interest rates meant it was time to consider whether there should be something else in the traditional balanced fund mix.
An obvious option was alternative assets, he said, or an investment such as gold.
“Fifty years ago that was a big part of a lot of particularly high-net-worth investors’ portfolios,” he said.
“Markets will determine whether it has to happen. Everyone is sitting there with yields on the floor and equities have had a correction recently but they’re still at very high levels. In most markets interest rates are at historical lows. It’s tricky. The world has to grow at the end of the day for equity markets to perform and it’s not growing very fast.”
John Berry of Pathfinder Asset Management agreed investors should think about the role of alternative investments in portfolios. He said it was not something New Zealanders thought about as much as those overseas.
At the moment, AMP, Mercer and Nikko are the only major managers with significant allocations to alternatives in their balanced funds. Nikko has the most, at 20%, followed by mercer at 115 and AMP at 4%.
Castle Point has the most traditional allocation – 21% cash, 39% New Zealand shares and 40% global shares.
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Comments from our readers
The first is to see an active fund manager owning up to moving to cash as the result of a market downturn.
The second would be to see fund managers coming to termswiththe fact that it is no longer sufficiently profitable for the customer to hold fixed interest inside a balanced fund. Especially in a platform or wrap account.
Take a look at Mint's Diversified Income Fund. It currently holds around 35% cash and has very little global fixed income exposure.
The fund is designed to provide 5% p.a income with a modest amount of capital growth and volatility of under 4%.
It differs from other income funds in that the manager has the ability to allocate dynamically across both global and domestic equity (including listed property) and fixed income.
Rather than starting with the strategic asset allocation and delivering whatever returns fall out of that, the manager starts with the objective and then invests wherever he believes is most appropriate to meet the objective.
The fund has $93m invested and has returned an annualised 6.3% net of all fees since launch in September 2014.
Disclosure: I work with with Mint Asset Management in a business development capacity.
That is why the Caste Point Balanced Fund is constructed quite differently to the traditional balanced fund. While at a headline asset allocation level it may look quite orthodox, each of our underlying managers operates to an absolute return benchmark. This gives them a free rein to not only invest in the best opportunities in their investment universe but to hold cash, and ‘alternative’ securities if they see a lack of opportunities. Right now, for example, our Australasian equity exposure is half in cash due to a scarcity of good opportunities. Our approach relies on our managers’ skill, not on theoretical correlations between different asset classes. As the author indicates, such correlations only remain valid until a crisis hits the market, which results in traditional balanced funds significantly underperforming their modelled expected returns.
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