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How will asset classes perform in 2016?

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7 January 2016

David Prosser discusses AIC fund manager poll results on the outlook for 2016.

As the New Year begins, financial advisers won’t be short of forecasts and predictions from investment experts about the outlook for the year ahead. And investment company managers have their own views about how asset classes will perform during 2016, as a poll from the Association of Investment Companies reveals.

The good news is that investment companies are optimistic – albeit less so than last year – with 60 per cent expecting markets in general to rise over the course of the next 12 months according to the AIC’s poll. In the UK, 88 per cent of managers are forecasting that the FTSE 100 will end the year higher than its current level, while Europe is the region most tipped to outperform. On a sectoral basis, they fancy smaller companies, technology, financials and commodities.

What’s really striking about the AIC figures, however, is the sheer disparity of views – as the world’s leading economies begin to head back towards monetary policy strengthening, and anxieties continue to stalk developing economies, there is little consensus about the year ahead. That reflects the uncertainties stalking investment markets.

Managers aren’t necessarily even sure that the stock market will be the best place to be during 2016. While 52 per cent expect equities to outperform, 10 per cent think gold could be the top performing asset class. Another 10 per cent tip commodities and natural resources, while a further 10 per cent go for commercial property.

That diversity might be seen as a reason to consider a multi-asset approach to portfolio allocation over the next 12 months – not least to mitigate the risks of investing in a single asset class area given such uncertainties.

If so, the closed-ended fund industry offers a number of opportunities to build multi-asset exposures. One possibility is a fund of funds – investment funds across a broad range of sectors invest in this way. Another option is a fund from the AIC’s new Flexible Investment sector, a grouping for funds that have a mandate to invest across asset classes.

More broadly, investment companies have certain advantages in uncertain markets. The vast majority invest actively, giving managers freedom to move out of volatile assets where they see fit, rather than requiring them to passively track the market. Also, their closed-ended structure means fund managers aren’t forced into liquidating assets when investors want their money back – this is a particularly useful feature for funds with exposure to illiquid asset classes.

Some advisers fear that investment companies will be more volatile during changeable market conditions – funds’ shares tend to trade at a discount to the value of the underlying assets, which may widen during turbulent times, while gearing can exacerbate market movements.

However, many closed-ended funds now have disciplined policies in place to deal with widening discounts. Gearing, meanwhile, is an option that investment company managers do not have to exercise.

Indeed, if 2016 is as unpredictable and uncertain as many believe, the investment company universe may be a good place for financial advisers to look for protection for their clients.

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