Evercore Pan Asset

Investors seem to like risk again. The more equity markets rise, the more dismissive of bonds many investors become. If you advise many people to keep a balanced fund, with a significant proportion in bonds, they are not impressed.

In theory longer term investors are right to prefer real assets. Shares after all give you rising dividends, property gives you rising rental income, and alternatives like private equity and commodities are beneficiaries of growth. In times of rising inflation, as we are suffering here in the UK and as much of the emerging market world is experiencing, there is comfort in the idea that your income can go up as prices rise.

In practice over the last decade longer term investors have done better in bonds than in shares in western markets. Share performance in the USA, UK and Euroland has been disappointing. Equities were badly hit by the hi-tec bubble at the beginning of this century, and hit more severely by the Credit Crunch in 2007-9. Meanwhile, the passage to a western world of low interest rates has flattered bond returns.

Buyers of balanced funds recognise that shares can go through bad patches and that bonds are not always the Cinderella investment. They want more capital stability than an all share fund produces. In 2008-9 when the shares markets were crashing, government bonds performed much better. They provided a cushion at a time of collapse.

A typical balanced fund may have 40% in bonds and 60% in shares. The problem for an investor is understanding what a manager means by balanced. Some think it does mean considerably lower volatility than an all share fund, and they stick with maybe 50% in bonds whatever happens. Others use discretion to go as high as 70% in shares and 30% in bonds. At a time of rising share markets this will give them higher performance.

In rising equity markets the investor smiles on the investment manager who stretches the concept of a balanced fund by putting more of the assets to work in share markets. If the markets suddenly decline, the investor is not so happy. The definitions of “balanced” can be quite loose. It is important when buying any balanced fund to see what the manager says he thinks balanced means, and to see how much leeway the manager has allowed himself to push the fund into riskier assets. It is also important to judge performance against the amount of risk the manager is in practice running. If you want an equity style performance in the good times, you are best advised to buy an equity fund.