How to find the right balance
A mixture of equities, bonds and cash in one fund can make an excellent core holding, leaving the investor free to take risks with more exciting vehicles
Given that fund houses are always telling retail investors to diversify and hold a mixture of asset classes in their portfolio, it is surprising that there is not much publicity given to the 60-odd balanced funds that are authorised for sale to the Hong Kong public.
As with many products though, the distributor is king when it comes to selling funds. Balanced funds are not that popular with banks and financial advisers who see them as a poor substitute for the portfolio construction service that they offer. It is better to cherry-pick the best equity and bond funds and tailor-make a package for each client, the argument goes.
While fund houses want you to buy as many of your funds as possible from them and them alone, few industry experts would actually argue with the wisdom of diversifying holdings across several fund houses. However, that does not negate the value of a balanced fund, which enables an investor to effortlessly switch between bonds, equities and cash as market conditions change, thanks to the expertise of the balanced fund manager.
'There is some value in picking the best of bond and equity funds in constructing a balanced portfolio, but it's not picking the fund companies that makes the money, it's getting the correct proportions in the portfolio. It's the strategy that you need to get right,' argues Stewart Aldcroft, managing director of Investec Asset Management Asia.
A balanced fund will never shoot the lights out, because that is not what it is designed to do. In the year to May 31 this year, the global balanced fund sector was down 0.35 per cent while global bond funds were up an average 20.43 per cent and equities were down 12.89 per cent. However, over the medium to long term, a balanced fund can make an excellent core holding, leaving you free to take more risks with sexier funds.
Look for a fund house with macro-economic capabilities and strong fixed-income managers. 'A fund house that is predominantly selling equity funds may have a bias towards equities in a balanced portfolio,' said Mr Aldcroft.
As with global equity funds, it is important to note the base currency of a balanced fund to take into account any foreign exchange risk. According to data from Lipper Asia, out of the top 10 performing balanced funds the first nine are denominated in euros. Top performers include the Fidelity Euro Balanced fund, up 11.99 per cent in the year to May 31, and the US dollar-denominated Investec GSF Global Balanced fund, up 6.59 per cent over the same period.
In Asia-Pacific mixed-asset funds, the choices are limited - only a handful of funds are on the market, but the JF Pacific Balanced fund is worth a look. Over the year to May 31 the fund was down 0.69 per cent but year-to-date it was up 5.27 per cent.
Balanced funds are almost certainly part of your overall investment portfolio - the vast majority of Hong Kong pension funds are managed in balanced portfolios.
'The ironic thing is, if it's good enough for pension fund managers, why isn't it for individual investors?' asks Mr Aldcroft.
Jane Parry is a financial journalist based in Hong Kong
