Traditional balanced fund models may not deliver

Jamie Young

With a focus on capital preservation, 5 Oceans is a balanced fund with a large number of investments diversified across assets in New Zealand and globally.

Castle Point Portfolio Manager, Jamie Young, says that balancing income and returns while managing risk is only going to get harder and he's concerned that many of the traditional balanced investment strategies will not perform according to investor expectations in future.

“The traditional strategies generally are too heavily constrained by index benchmarks, so the underlying managers have no option other than to follow the market down during a crash.” 

Young believes that the risk of the traditional balanced fund model breaking down is even higher now than during the GFC given the distortions in financial markets created by low interest rates. “Currently, people have been investing in bonds for capital gains and equities for income. The diversification that traditional balanced funds rely on may prove to be just an illusion.”

Describing it as "a fair potential argument", Morningstar's Director of Manager Research, Tim Murphy, says that in comparing the two market environments, "the difference in starting point of interest rates is certainly material and would support that argument."