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Traditional balanced fund models may not deliver

The ability to swim away from risk underpins the investment philosophy behind the new 5 Oceans Fund launched by Castle Point Funds Management.

Wednesday, December 7th 2016, 5:58AM

by Owen Poland

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."

However Murphy is more sanguine about Castle Point's desire to swim against the tide by using managers who are generally not constrained by market indices. "The questions you've got to ask are - do those managers have the appropriate skills, resources, expertise etc to execute their flexible strategies appropriately."

There's no argument from Mercer Investments about wanting to manage away from benchmarks. If you're trying to manage the risk from rising interest rates, then having a dynamic asset allocation strategy like Mercer's is important according to Head of Investment Phillip Houghton-Brown.

"We think there's scope for active management to manage the risks that exist within a benchmark, whether it's bonds or equities. It's something that we think is an important part of the investment process."

As Mercer Investment's principal, David Scobie, pointed out in his article 'Look under the bonnet of bond benchmarks', bond indices are "dynamic beasts" and by being in a fund which closely or broadly tracks the Barclays Index "the interest rate risk exposure has increased markedly over time without an investor necessarily having made any active decision."

Tags: Castle Point Mercer Morningstar

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