The M&G Charity Multi Asset fund was launched in November 2019 and was a remodelling of the “National Association of Almshouses Common Investment Fund,” a multi asset offering for member Almshouse charities managed by M&G since 1962.
The fund’s new structure made the strategy available to all UK charities, and also meant greater flexibility for the fund manager in terms of both the range of assets that could be held, and in the management of fund distributions to investors.
This flexibility would be needed over the next five years, as most of the global economy was switched off and then on again in response to the COVID pandemic and UK interest rates went from lows of 0.1% to highs of 5.25%. Along the way there have been wars, four UK Prime Ministers, and the emergence of new technology that seems likely to profoundly change the world.
In navigating that phase the fund has delivered an annualised total return of 5.7%, below the benchmark return of 6.5% per year, but above the 5.0% return from the IA Mixed Investment 40-85% Shares sector. Those holding the fund for income will have seen distributions grow over the period and, against the backdrop of lockdowns, the use of fund reserves has allowed stability in that income delivery which would not have been possible otherwise.
The fund aims to provide a level of capital growth and income that is higher than that of a benchmark consisting of 75% equity markets (45% UK and 30% non-UK) and 25% fixed income exposure (12.5% each UK and non-UK). The fund also aims to provide an annual yield of at least 3%.
The fund manager, Tristan Hanson, is part of M&G’s Multi Asset Team, a group that seeks to generate returns through active allocation across asset classes and regions. In this fund, asset class exposures will typically be achieved by investing in other funds managed by M&G Investments.
The M&G Multi Asset team believe that opportunities in markets are often created in periods during which panic or complacency dominate underlying fundamentals. Rather than seek to forecast the future, the team aim to be reactive to extreme price moves, often in a contrarian fashion. This element of the approach has been critical in navigating the twists and turns of the last three years.
In the initial months of the fund’s existence, equity markets had been strong, especially in the US, but in the main still looked reasonably attractive relative to fixed income markets where yields were extremely low.
The fund therefore entered 2020 with material exposure to equity markets and limited exposure to fixed income assets. This left the portfolio relatively exposed to the market weakness that surrounded the initial months of the pandemic outbreak.
However, such periods of deep stress and panic in markets are often fruitful for the M&G multi asset approach. After the market declines, the manager was able to put capital to work, bringing equity exposure to around 85% with the addition of new positions in the M&G Global Sustain Paris Aligned and M&G Positive Impact funds. The move proved beneficial as equity markets recovered from their initial weakness in the latter part of the year.
Over the course of 2021, the panic of the previous year gave way to far more relaxed sentiment in both bond and equity markets. Equity markets did well, particularly the US technology sector, and despite having increased from their lows, many developed market government bond yields remained lower than their pre-pandemic levels.
This left many major asset classes at relatively stretched valuations, especially in the face of inflation that was already extremely high. With hindsight we can see the significant degree of complacency among market participants that was in place as we entered 2022.
Having been prepared to be more aggressive in the face of market panic in 2020, the fund now adopted a more defensive positioning. The portfolio spent much of 2022 with very limited exposure to fixed income assets (with a preference for emerging markets), higher levels of cash, and a relatively ‘neutral’ stance on equities. This helped to lessen the impact of the sharp declines in many major assets, and aims to avoid the declines seen by the benchmark and peer group in that calendar year.
The first half of 2023 was relatively calm in the context of the preceding three years, but the second half of the year was dominated by intense sell-offs in bond markets as investors became worried about higher interest rates for a sustained period. By September and October, the sheer extent of this sell-off suggested that there was some panic involved and that prevailing yields offered good compensation for inflation and rate risks.
The fund therefore took the opportunity to add exposure to longer dated government bonds in both the US and the UK. Though challenges from growing debts and inflation are real, ultimately the path of interest rates should be most significant. Moreover, at prevailing yields these positions can provide diversification in scenarios where the fund’s equity exposures are challenged.
During 2024 there were notable bouts of opportunity in equity markets, first in China, then in the Japanese ‘flash crash’ and finally in South American assets. The chart below illustrates, while total equity exposure has been kept at relatively neutral levels since the opportunity in early 2020, such periods of volatility have provided opportunities to diversify the portfolio.
As 2024 came to an end however, it had been a relatively frustrating couple of months for the fund, which lagged very strong performance from US equity markets in particular. The portfolio’s preference for more income-focused stocks and regions were a key driver here. While the opportunities of AI are exciting and the policies of Donald Trump likely to be supportive for the US corporate sector, the fund is wary of chasing returns at these valuations. Should euphoria become more entrenched, the fund may lean further away from the US equity market.
In the COVID period many global companies were forced to reduce or cut dividends while already low bond yields typically fell further. This made it a challenging environment for strategies with an income aspiration. However, the flexibility of the M&G Charity Multi Asset fund to make use of income reserves meant that the fund was able to smooth the payments made to investors and maintain a yield comfortably above the fund objective.
Since then, higher interest rates around the world have improved the options on offer for income delivery, allowing the manager to diversify income sources and maintain trailing yields in the region of 4%.
Five years after the launch of the fund, many assets look more attractive than they did at launch, most notably in the fixed income space. There are however some major areas to be wary of, most notably in US equity markets and in developed market corporate bonds where valuations appear vulnerable to anything other than very positive outcomes. This is illustrated in the chart below, where prevailing asset valuation are shown against some sense of fair value (indicated by a grey ‘zone of neutrality’). Assets like European AA and BBB credit or US and Indian equities, which are materially below the grey bar are offering less compensation for risk (and therefore relatively optimistic expectations on the part of the market) than might be expected over the very long term.
The fund is therefore again relatively contrarian in its positioning. US equity exposure is limited, while exposure to the UK is high but somewhat ‘underweight’ as attractive opportunities have presented themselves in Asian and emerging markets in 2024.
In the fixed income space the fund is largely avoiding corporate bonds and preferring government bonds in the UK and US, where yields provide a diversifying and secure income stream as well as potential protection if there are challenges to global growth from here.
The fund is also positioned so as to be able to respond should volatility such as that seen in the Japanese ‘flash crash’ in recent months present further opportunities.
The main risks associated with this fund: The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The fund invests in other funds, which are subject to the risks associated with the type of assets held in those funds. Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund. The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment. In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the fund in the best interest of all investors. Further risk factors that apply to the fund can be found in the fund's Prospectus. Further risks associated with the fund can be found in the fund’s Key Investor Information Document.
The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. Where any performance is mentioned, please note that past performance is not a guide to future performance.
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