Cautious investors who are seeking greater diversification in their portfolios and a return above cash and inflation are turning to multi-asset funds, according to fund manager M&G.
In what M&G calls a “challenging time for markets”, it believes his unconstrained approach to identifying undervalued assets has been a key factor in the M&G Cautious Multi Asset Fund's strong performance over the past three years.
The fund, managed by David Jane, is able to participate in rising asset values in the good times and preserve its capital from the worst of market downside volatility in the bad times.
Jane has recently reduced his emerging market exposure - particularly in China and Brazil - in favour of Japan, which was a big laggard last year, and industrial space. During the latter part of last year, Jane was also building up exposure to defensive areas of the market such as utility companies and pharmaceuticals.
Buying shares of dividend paying companies is a proven strategy in the stockmarket and M&G says holders of UK income funds have been handsomely rewarded over the long run with competitive returns ahead of inflation.
The dividend culture is not unique to the UK however. Equity income is a proven strategy worldwide and M&G believes that investors may be missing out on some excellent investment opportunities if they restrict themselves to the UK.
“Our aim is to identify companies with strong financial discipline that can provide a rising income stream over time - wherever they are on the planet,” said Stuart Rhodes, manager of the M&G Global Dividend Fund.
“This is the essence of income investing, in our view, and the breadth of a global investment universe allows us to pick the best opportunities without any geographic constraints."
Despite a very strong year in 2009, M&G says there is still value to be had from an investment in corporate bonds, particularly if investors choose a fund able to do the now much harder job of sorting the wheat from the chaff.
Credit spreads, the extra yield offered by corporate over government bonds, fell dramatically for much of 2009, but current spread levels are still more than enough to compensate investors for the risk of default in many cases.
Richard Woolnough, manager of the M&G Optimal Income Fund believes that, funds with the flexibility to switch across government, investment grade and high yield debt allow the manager to seek out-performance regardless of the economic background - offering investors one product to suit all their fixed income needs.
M&G also believes that commercial property is set for recovery, saying that investor sentiment continues to remain buoyant, underpinning the positive momentum in the UK commercial property market.
“Amid a marked improvement in investor sentiment, yields on prime properties (well-located assets that generate strong rental income) continue to contract,” said Fiona Rowley, manager of the M&G Property Portfolio.
“The market is broadening with good secondary property firming, but weaker properties, where the risks of insolvencies are greater, are likely to remain vulnerable - for now. People are buying into property due to the attractive yields available, relative to government bonds and cash.
"While we believe UK commercial property looks good value, we expect to see the strong investment market rally that built throughout the fourth quarter of 2009 to cool off to a degree, as the first half of 2010 progresses.
“As we move through 2010, investors will begin looking for early signs of recovery in the occupier market. If the tentative signs of improvement in economic activity continue during the year, this should begin to feed through to the occupier market and bolster tenant demand for 2011."
