‘Balanced’ may tip the scales towards risk

Private investors have put billions of pounds into so-called “balanced managed” funds without realising how volatile, or poorly performing, these investments can be, a new report suggests.

Research by Skandia, the investments group, has found that, of 489 balanced managed life funds, just 5 per cent had a medium risk level of five out of ten.

Advisers have suggested that investors in balanced managed funds – which include open-ended investment companies and pension funds – review their holdings and consider switching.

Balanced managed funds, as classified by the Association of British Insurers (ABI), are supposed to be diversified across a range of asset classes. They can hold no more than 85 per cent in equities and can also hold property, fixed-interest bonds and alternative assets.

As a result, they are one of the most popular types of fund for company pension schemes – often selected as the “default” fund, into which investors are put if they make no other choice.

But the way the funds invest differs hugely. Skandia analysed balanced managed funds by comparing three-year performance with three-year volatility and found large variations in both measures (see chart).

One of the more volatile funds, Scottish Equitable UBS Balanced Managed, has 75 per cent in equities and nearly a quarter in fixed interest (see box). By contrast, another fund, Axa CF Miton Special Situations, has less than 25 per cent in equities.

Skandia says the findings point to an “urgent need” to review existing investments.

“The definition of managed fund sectors is extremely broad and this means that a huge number of funds that are categorised as having a similar investment profile actually deliver a very wide range of different outcomes,” says Peter Jordan at Skandia.

“If people have just picked funds on the basis of whether ‘balanced’ is in the name, the outcomes may not be consistent with what their attitudes are,” he adds.

The ABI says its sectors are not supposed to suggest anything about the relative risk of funds.

“The ABI does not classify funds according to the riskiness or the specific investment strategies of each life and pensions fund,” says Maggie Craig, the ABI’s acting director-general. “It is for providers and advisers to ensure that the relative risks of each investment fund they offer and the fund’s investment strategy are made clear to investors at point of sale.”

But the ABI says it is reviewing some of its sector classifications later this year – including balanced managed – to look at changes that “could or should be made”.

Many investors put money into balanced managed funds during the 1990s, before investment funds had diversified into the multi-
asset strategies that are common today. As a result, there is now £196bn in these funds.

Hargreaves Lansdown, a financial adviser, has pointed out that many of the pension funds are now closed to new investment, so there is little commercial incentive for the managers to improve performance.

“I suspect there are a lot of managed funds run by insurance companies using very tight benchmarks with restrictions on what managers can and can’t invest in,” says Laith Khalaf, pensions adviser at Hargreaves Lansdown.

Jesal Mistry, a pensions consultant at Aon, says that some balanced managed funds rely too much on equities for their performance, rather than diversifying into other assets, as they are supposed to do.

He says investors who want to diversify should consider absolute return or multi-asset funds – while those who are investing for growth should just pick a fund that has 100 per cent
in equities.