Consistency in a sea of uncertainty

In addition, the plight of the adviser has been exacerbated yet further if you consider just how problematic it has been to asset allocate over the last five years. To illustrate the point, the table below shows just how wildly different returns have been from different asset classes. Simply put, it would appear that the only consistency is inconsistency. So while it is universally acknowledged that asset allocation can be a major driver of returns, it is challenging to get it right.

This challenge has played an important part in the development of online asset allocation tools and support media within the retail market, usually fuelled by economic data from independent suppliers. Whilst many of these tools hold great merit for both advisers and investors alike, they may not be appropriate for all. In fact, at Newton, we would argue that outsourcing to a top-tier investment house is an ideal solution for many.

The rise of multi-asset strategies

At the same time as the rise in popularity for asset allocation tools, so appeal has grown for multi-asset solutions that use a diverse range of asset classes in helping to reduce the risk of market movements within any single asset class. With £38 billion*, the IMA Balanced Managed sector is the sixth biggest sector in terms of assets under management and offers an important solution to advisers.

Yet, asset allocation (and volatility) within the sector itself can vary wildly as fund managers allocate their portfolios according to their conviction. As such, one fund holds 51.2% in European equities while at the other end of the scale there are funds that have a zero weighting to Europe. The spirit of the sector does allow such flexibility as the criteria for eligibility are as follows:

• No more than 85% in Equities
• At least 50% in Sterling Denominated Assets
• At least 10% in overseas equities

Newton is one such house that offers a balanced fund, namely the Newton Balanced Fund. Launched in 1986, it is helpful to understand Newton’s approach to portfolio construction and the process applied to help the fund perform in different economic scenarios.

The importance of themes

Newton’s wide-reaching perspective on the financial landscape is achieved through the use of investment themes. These themes reflect underlying long-term economic, political and social trends across the globe, and enable managers and analysts to maintain perspective in the face of short-term market “noise”. Themes help managers and analysts to identify areas of both opportunity and risk across the global investment universe.

The Newton Balanced Fund is one of Newton’s longest running funds and has produced compelling risk-adjusted returns. Over the last five years, the fund has delivered annualised returns of 6.68% with 12.28% annualised volatility versus IMA Balanced Managed sector average of 1.75% annualised returns with 12.55% annualised volatility**. Comfortably ahead of its sector average with such attractive relative and absolute performance, we believe the Newton Balanced Fund is a core, stable and return-generating solution for a long-term investor.

Nick Clay is Director of Investment Management at Newton Investment Management Limited.

* Source: IMA as at 31 August 2011.

** Source: Lipper as at 31 August 2011. Fund performance is calculated as total return including reinvested income net of UK tax and annual charges but excluding initial charge. The impact of the initial charge, which may be up to 4% can be material on the performance of your client’s investment.

Performance figures including the initial charge are available on request. Past performance is not a guide to future performance.