The two funds from the same sector we have sold

Saltydog analyst explains why performance is starting to cool for this fund sector, which has led to the sale of two funds.

To limit the overall volatility of our demonstration portfolios, most of the funds we hold come from the sectors that we classify as either ‘Slow Ahead’ or ‘Steady as She Goes’.

For the last couple of years, our largest holdings have been in the ‘Mixed Investment 40-85% Shares’ sector that sits in our ‘Slow Ahead’ Group. This is similar to what was once known as the ‘Balanced Managed’ sector.

The sectors are monitored and regulated by the Investment Association (IA) and their definition of the ‘Mixed Investment 40-85% Shares’ sector is: funds in this sector are required to have a range of different investments. However, there is scope for funds to have a high proportion in company shares (equities). The fund must have between 40% and 85% invested in company shares.

• Maximum 85% equity exposure (including convertibles).
• Minimum 40% equity exposure.
• No minimum fixed income or cash requirement.
• Minimum 50% investment in established market currencies (US dollar, sterling and euro) of which 25% must be sterling.
• Sterling requirement includes assets hedged back to sterling.

It is important to note the currency requirements. A minimum of 25% must be sterling, or another way of thinking about it is that 75% can be in foreign currency.

Although the pound has strengthened over the last 12 months, the outperformance of overseas investments has more than compensated for it. As a result, funds from this sector that have a bias towards overseas investments, especially the US, have thrived.

We were holding a number of funds from this sector for most of 2019, but sold them in February and March 2020 when we saw their performance start to dip. We went back into them in April 2020 when they began to recover.

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Investors taking a long-term buy and hold approach are encouraged to hold a wide selection of funds covering most of the different IA sectors. When some are struggling, hopefully others are doing well and on balance you might come out on top.

We take a different approach. If something is doing well, we will invest in it and then hold on to it until its performance starts to deteriorate. If something is not doing well, we will steer clear. As a result of this, we ended up with four funds from the ‘Mixed Investment 40-85% Shares Sector’, all of which had significant exposure to the US.

In the last few months, we have seen the UK economy start to recover, and at the same time the pound has strengthened. It started the year worth less than $1.37, now it is above $1.41. A gain of 3.2%. The combined effect has given funds investing in UK equities an advantage compared with those investing overseas.

Past performance is not a guide to future performance.

Two of the funds that we are holding from the ‘Mixed Investment 40-85% Shares’ sector, the Royal London Sustainable World and Baillie Gifford Managed funds, have recently broken our ‘three weeks in decile six or worse rule’ and so have been sold.

Past performance is not a guide to future performance

They have had a great run over the last year, but we now feel that there are other funds in different sectors giving better opportunities.

At the beginning of April, we invested in the Royal London UK Income with Growth, M&G UK Income Distribution and HSBC Monthly Income funds. These funds are all more focused on UK investments.We added to them last week.

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