Navigating through the current uncertain markets

Nick Samouilhan

A former lecturer in economics and finance, Nick manages Aviva Investors’ risk-targeted multi-asset funds and is a co-manager of the AIMS Target Income fund. 

Has there ever been a more difficult time to be an investor?

Low interest rates have caused difficulties for savers for the best part of a decade. They have also helped drive up the price of financial assets such as equities, bonds and property to levels which have left many wondering if they can go much higher. Add in factors such as the fall in the pound, which makes investing overseas more expensive; the recent uptick in inflation, which threatens to erode investment returns; and all the political uncertainties around the world – and the picture becomes even more complicated.

Answering the big question

So where can you invest for income and or capital growth these days? The answer may lie with ‘outcome-oriented’ funds, which aim to produce steady long-term performance – regardless of the investment climate – in line with a specific target of generating income or growing capital.

To achieve their aims, these funds combine a wide range of investment strategies, some of which perform well when markets rise, and others when they fall. With the freedom to invest where they want, outcome-oriented funds offer investors exposure to an almost limitless pool of investment ideas in an effort to generate specific returns.

An outcome-oriented fund could, for example, seek to deliver annual capital growth of X percent above the Bank of England’s base rate or inflation – regardless of market conditions over a rolling three-year period. At the same time, it would strive to preserve capital. The fund manager would identify investment ideas or strategies that should generate positive returns and then decide which types of investment to use to implement the ideas.

Strategies for variable market conditions

The manager could, for example, invest in equities, bonds, currencies or derivatives. The latter is a financial instrument whose value is derived from an underlying asset, such as an equity index or a commodity. The manager would then blend the strategies together so they complement and balance each other. Since markets can be unpredictable, the aim is to develop strategies for the fund that will perform well in a variety of market conditions. Importantly, these funds contain risk-reducing strategies, which are designed to cushion performance when markets behave unexpectedly. As events last year demonstrated, even the best economists or investors cannot claim to predict the future correctly.

Alternatively, outcome-oriented funds can seek to deliver a specified income. A fund might, for example, aim to provide an annual income of X percent above the Bank of England’s base rate or inflation regardless of market conditions, whilst again seeking to preserve capital. It could achieve its goal by investing in a diverse range of income-producing assets, such as equities, commercial property, government and corporate bonds. Each has their pros and cons and at any one time there are likely to be more attractive opportunities in one area than another. However, combined intelligently, these assets can create a more balanced income portfolio than would be the case if an investor relied on just one or two sources.

To help in achieving these funds’ objectives, regardless of how financial markets are faring, the portfolios of outcome-oriented funds can be quickly adjusted. This ensures they remain appropriately positioned as the outlook for markets and economies shifts. In a highly uncertain world, these types of funds may provide the element of reassurance that many investors are looking for.

 

 AR01927 03/2017

 

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