Flexible investment

Could this investment company sector be the answer for those worried about economic and political uncertainty?

Is it time for investors and advisers to be a little more flexible in their investment approach? The direction of world markets and global asset classes is now so difficult to call that pinning your colours to the mast of a narrow asset allocation strategy might be considered as moving beyond brave into the realms of recklessness.

To take a case in point, a recent straw poll of almost 30 financial firms from stockbrokers to fund managers reveals a remarkable disparity between their expectations for the year ahead. The poll, conducted by Investing.com, includes predictions for the 2018 year-end value of the FTSE 100 Index that range from 6,500 to 8,600 (compared to around 7,400 today). A similar level of divergence is obvious in the firms’ forecasts for the performance of other global markets next year.

Uncertainty, in other words, abounds. There is no shortage of pundits who believe the next 12 months will see a continuation of the extended bull market run for global equities. Others are equally convinced that the good times are coming to an end. You get an equally mixed view, by the way, if you ask about the prospects for bond markets – or commodities, currencies and property for that matter.

In this age of heightened economic and political volatility, this level of uncertainty is only to be expected. There are good reasons to be positive about the outlook for global markets – improving economic growth in the US and the eurozone, for example, the benign interest-rate environment, and the stabilisation of China – but plenty of anxieties too; not least, increasing geo-political tensions and the Trump administration’s unpredictability.

Against this backdrop, how do advisers and investors position their portfolios? Well, certainly the traditional advice to maintain diversification and balance rings truer than ever. But maybe it is time to consider hardwiring those principles into portfolios by looking beyond funds with narrow asset class specialisations.

In this regard, the Flexible Investment sector launched at the beginning of 2016 by the Association of Investment Companies may look increasingly appealing. It contains a diverse bunch of funds but all of them adhere to the principle that the manager has the freedom to invest in a range of different types of assets – equities and bonds, yes, but also everything from infrastructure to unconventional debt instruments, and sometimes even cash. In the current market environment, the flexibility to range so freely may be especially valuable.

It’s difficult to generalise about flexible investment companies; the funds in the sector are inevitably so different that comparisons are meaningless, and each vehicle will require its own due diligence before advisers and investors make a commitment. It’s reasonable to say, however, that the investment company structure is particularly appropriate for this type of fund – often, the investments managers choose to make will be in illiquid asset classes, where open-ended funds struggle because they have to worry about managing inflows and outflows.

It’s only fair to point out that closed-ended funds in this sector are asking investors and advisers to show them a high degree of trust. Their flexible investment mandates inevitably mean that performance will often diverge considerably from standard benchmarks and the returns delivered by the funds in the sector will often be markedly uncorrelated.

Indeed, generally, these funds focus on delivering consistently positive returns rather than seeking to outperform any particular index. That may not feel comfortable for some investors, who are used to looking at whether funds beat the market, but in these uncertain times, it may be that a focus on not losing money is exactly what is needed.