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An end to 'set and forget' for cautious investors


As central banks look to end a decade of ultra-loose monetary policy, many investors are reassessing how to preserve their capital. Government bonds from developed markets, such as the UK, US and Europe, imply low or negative real returns over the medium term. The direction of travel for monetary policy means they may also no longer consistently provide protection from stockmarket volatility, as demonstrated in 2018. Cautious investors therefore appear unlikely to be able to rely on ‘set-and-forget’ strategies to achieve their investment goals.

Asset correlations may be changing


Source: Datastream, 2 August 2018 *Rebased as at 29 May 2015.

Since mid-2016, the correlation between equities and bonds has been uncertain. Past performance is not a guide to future performance.

Targeting absolute returns

Greater consideration of more active approaches to diversification has contributed to the rise of ‘absolute return’ strategies. Absolute return funds typically aim to deliver specific, positive returns over a defined period and tend to exhibit low correlation with individual asset classes over three to five years. However, it is important to note that these returns are not guaranteed.

A multi-asset approach

Investors looking to preserve their capital, while at the same time targeting returns above cash savings, have begun to assess a broader investment universe. Multi-asset approaches are designed to provide exposure to assets whose fundamental drivers of returns have low or sometimes negative correlation to each other, with a view to providing a smoother path to positive returns over time. Generally, this involves investing in a wider range of asset classes, including equities, bonds and currencies from both developed and emerging markets.

Reducing volatility

To reduce potential volatility and monthly losses within an investment portfolio, exposure to these different types of asset should be kept within appropriate levels from a risk-reward perspective. Asset valuations today suggest that excessive risk aversion is likely to be detrimental to earning positive real returns, given low implied returns on developed market government bonds. Therefore, risk management – rather than risk avoidance – appears key to earning positive real returns over time.

M&G Global Target Return Fund

In response to these considerations, we launched the M&G Global Target Return Fund in 2016. As a multi-asset, absolute return fund, it is designed to minimise volatility and monthly losses while targeting total returns of 4% per year above cash rates*, before any charges are taken, over any three-year period and in any market conditions. Please note that there is no guarantee the fund will achieve its objective. The value of investments will fluctuate, which will cause fund prices to fall as well as rise, and investors may not get back the original amount they invested.

The fund aims to achieve this using the M&G Multi Asset team’s ‘Episode’ investment philosophy, which integrates a valuation-led perspective with elements of behavioural finance. The team has successfully applied this philosophy for nearly 20 years and today manages over £19bn of assets.

Please note that this fund allows for the extensive use of derivatives.

*We define cash rates as three-month GBP LIBOR. This is the rate at which banks lend British pound sterling to each other.

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The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. 
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