The traditional approach of combining bonds and equities in a portfolio is not necessarily the best way to improve risk-adjusted returns

Hardeep  Tawakley
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The traditional approach of combining bonds and equities in a portfolio is not necessarily the best way to improve risk-adjusted returns

Partner Insight: Over the past five years, global markets have performed well in the shadow of significant event risk, from the Chinese banking liquidity crisis of 2013 to the volatility caused by the threat of a global trade war (amongst other issues) earlier this year.

It has been a particularly difficult time for funds in the IA Targeted Absolute Return sector, as many vehicles have struggled to produce steady returns and protect investor capital amid market tumult.

But one fund that stands out in the category as having consistently outperformed both the sector and its inflation-linked target is the £1.4bn* Threadneedle Dynamic Real Return Fund, managed by Toby Nangle since its launch in June 2013.

The Fund aims to produce a return of UK CPI inflation plus 4% gross of fees over the medium to long term gross of fees, but with up to two-thirds of the volatility of the equity market, which makes it suitable for a wide range of investors - from pension funds to IFAs.

Having recently celebrated its fifth anniversary, the Threadneedle Dynamic Real Return Fund has delivered a gross annualised return of 6.4% (5.4% net of fees) over five years to 31 August versus the UK CPI index return of 1.5%. Meanwhile, over five years absolute volatility has been at a steady 4.8% - some way below the two-thirds of equity volatility target.**

The manager has achieved this through close collaboration with the group's eight-strong Asset Allocation Strategy Group and in-house analysts, and by sticking to a disciplined approach throughout tougher time periods.

Nangle explains: "Our reason for using in-house funds is about joining up the investment strategy. If we used another firm's strategy, we would have less control from a risk perspective. It also means we can keep it very attractively priced for our clients, while managers using external funds typically have higher fees."

The portfolio is composed of direct investments, passive strategies and internal active fund wrappers such as the Threadneedle Japan, European Select and UK funds. This allows the firm to keep charges low.

‘No neutral'

One of the key aspects differentiating the Fund from its peers is the way Nangle approaches asset allocation. Unlike many of its peers, the Fund is not built around a strategic asset allocation, but rather follows a dynamic unconstrained approach.

This means the minimum limit for every asset class is 0%, with allocation to equities permitted to rise up to 75%, bonds and cash to 100%, property to 20%, commodities to 20% and alternatives to 10%.

"Everything has to earn its way into the Fund. The asset allocation is managed dynamically across the risk spectrum, from periods where we seek to protect our investors' capital, to times where we believe risk assets will be well rewarded and as such we seek to participate in growth opportunities."

Nangle believes the traditional approach of combining bonds and equities in a portfolio is not necessarily the best way to improve risk-adjusted returns, citing 120 years of historic data showing that this relationship between equities and fixed income is a relatively new phenomenon.

Click here to read the full article and gain access to the exclusive Columbia Threadneedle guide to dynamic returns from fund manager Toby Nangle.

 *Source: Columbia Threadneedle Investments. As at 31 August 2018. **Source: Columbia Threadneedle Investments / Morningstar. As at 31 August 2018. The fund launched on 18 June 2013. Net performance calculated bid to bid, net income reinvested based on Z share class (GB00B93TQ868). Gross performance calculated offer to offer, gross of annual management charges, using Global Close prices. Equity volatility measured as MSCI World index. Please note the Fund may not achieve its investment objective. Past performance is not a guide to future performance.

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