By Susan Hely,
, October 2007
A good diversified fund is hard to beat. You can pick the level of market risk that you want, from conservative to high growth.
An investment that will help you sleep at night is a good diversified fund. It has inbuilt safety features that single asset class funds don't have.
"A fund for all seasons is a diversified fund. A diversified fund gives you diversification in each sector of the market such as shares, property and fixed interest," explains Eric Smith, chief investment officer of Vanguard. "Then you can diversify the risk within the selection of diversified funds. You can choose a high growth or growth or balanced or conservative fund."
Sallyanne Cook, Morningstar consultant, says that the negative returns for many property and share funds in August should remind investors of the perils of relying on a single asset class investment and reinforce the benefits of diversification in an investment portfolio. She says it's a wake-up call for investors who are expecting the double-digit returns of the past few years to continue. "Market volatility like this shows us yet again the benefits of maintaining a diversified investment portfolio with exposure to multiple asset classes."
Diversified funds take the asset allocation headache out of your hands and do it for you. The only decision you have to make is how much exposure you want to have to growth assets. Here are three excellent funds that have growth assets that range from 20 percent for the Westpac Conservative Growth Fund, 60 percent for the Colonial First State FirstChoice Moderate and 97 percent for the ING OneAnswer Investment Portfolio Active Growth Fund.
Growth assets have been the hot performers over the past five years, but that may not be the case in the future.
A bias to low risk
If you don't have an appetite for risk, here's a low-risk investment that holds 80 percent in cash and bonds together with only 20 percent in growth assets, such as Australian and international shares, plus property. The fund aims to get the highest return for the lowest level of risk.
It does this by diversifying the risk and holding only a small portion of the fund in shares and property. It's designed to give investors stability of earnings, says Mariann Guerreiro, portfolio manager, multi-strategy, BT Financial Group. The fund pays out quarterly income.
Where have the fund's returns come from? The small allocation to shares provided much of the return while a high level of investment in cash also helped. The cash rate outperformed the rate for Australian and international bonds. Crispin Murray's equity team at BT Financial Group manages the Australian shares while the fund outsources the international shares to index manager State Street to keep the volatility low.
Guerreiro says the recent correction had been long anticipated but is confident the fundamental drivers of global economic growth are intact.
This balanced fund is more risky than the conservative fund because it has 60 percent in Australian and international shares and property while at least 40 percent is in fixed interest and cash. It has the potential to hold up to 50 percent in defensive assets, giving it a big buffer against the ricocheting share market.
Colonial First State outsources the investing to 27 external fund managers and it is known as a multi-manager, multi-sector fund. "What we do is blend different specialist managers who are experts in their area of investment with different styles such as growth and value, so that the fund is style neutral," says Alan Kenny, general manager, product and investment services, Colonial First State.
The fund manages risk three ways. It uses different managers for different sectors and diversifies the investments within each asset class. "We take the decision-making out of the client's hand and it goes to Colonial First State and we review the fund on an ongoing basis." The fund's recent performance has been boosted by strong share markets and property markets.
Flexible active investment
Most funds set their assets to an asset allocation benchmark but this star-performing fund is one of the few with no benchmark. One of the first absolute return funds, launched in Australia 19 years ago, it allows the manager to actively invest in the asset classes that are expected to do well.
"It's much more flexible." explains Eric Siegloff, director of asset allocation and investment strategy, ING Investment Management.
Investors need to keep this in mind if they are looking for a conservative fund. This one hasn't any of the buffers of the other traditional diversified funds though it can become 100 percent defensive if the fund manager believes this is the best strategy.
How has it performed over its 19-year history? The Mercer surveys that go back only 15 years rank the fund number one, as it has delivered an average of 11.6 percent a year. The fund aims to outperform the consumer price index by five percent over a five-year period, but it has outperformed this by another three percent a year, delivering eight percent on top of the CPI, says Siegloff.
While some diversified funds are tied to conservative assets that act as a ballast in stormy times, this one's free to drop all fixed interest investments the strategy it's adopted lately. It's paid off, with growth assets having a tremendous run. Siegloff says 97 percent of the fund's assets are in growth assets such as Australian and international shares and Australian property. Only three percent is in cash. It also uses derivatives and physical securities.
Siegloff says there is uncertainty and volatility in the market as the US slows down and this creates many opportunities in the Australian share markets for this fund. "You can't get too negative on world equity markets. I'd be looking for a soft, not a hard landing at the moment." If that changes, the fund has the flexibility to move to defensive investments.
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