Mixed and total return sector review – what’s next for bonds and shares? – Hargreaves Lansdown

In the past year, the global economy has continued its recovery from the effects of Covid-19, which saw global GDP shrink by 3.1% in 2020. World economic output is now forecast to rebound by 5.9% in 2021 and is on course to set the fastest post-recession pace of a recovery in the last 80 years.

The recovery hasn’t been a completely smooth ride, though, and has differed by country and region. Coronavirus vaccines have helped ease and lift lockdowns, but their rollout has varied widely by country.

Covid-19 led governments and central banks to step in and support economies in the first half of 2020. Interest rates were lowered further, and governments borrowed more money to prop up economies. These measures have been important in supporting countries through the crisis and enabling their recovery. They have also helped calm investors’ fears.

The past 12 months have been positive for major share markets, which have risen with many at or near all-time highs. The UK, US and global share indices all returned more than 30%* in the past year. As always, past performance isn’t a guide to future returns.

In the UK, sectors like banks and oil & gas have been standout performers after suffering large losses in 2020. These cyclical companies do well when the economy is doing well. And after a 9.8% fall in 2020, the UK’s economy has bounced back and grown steadily in 2021.

It’s not been such a positive story in emerging markets, though. The FTSE Emerging index grew by 10.75% in the past 12 months. On its own this is an impressive return over a one-year period, but it lags well behind the FTSE World return of 32.29%.

Vaccine rollouts in emerging market countries haven’t been as fast overall as those in developed markets. China, which makes up a large part of the emerging market index, has had a challenging time, with the FTSE China index down by -9.4% over this period.

Asia & emerging markets review – Russia storming ahead while China struggles

What could the future hold?

With the worst of the pandemic seemingly behind us, governments and central banks are now starting to take away their support, to varying degrees.

The US Federal Reserve recently announced a reduction, or ‘tapering’, of its stimulus programme. Some countries like Norway, Brazil and South Korea have already started raising interest rates. Over the next couple of years, the US Fed is expected to begin raising rates, while the Bank of England could begin increasing rates much sooner.

This is all to help tame inflation, which has been on the rise around the world in 2021. Supply constraints, rebounding demand, and ‘base effects’ compared with much lower 2020 prices, have all helped push inflation higher. Supply typically adjusts to meet increased demand and keep a lid on prices. But the pandemic has disrupted supply chains around the world, causing goods shortages to be unusually persistent.

Key central banks of the US, UK and EU don’t expect higher inflation to be here to stay, but it’s expected to stick around into 2022. So, it still has the potential to speed up so-called ‘tightening’ of monetary policy. This involves raising interest rates to make borrowing more expensive to help bring inflation back down towards their targets. This is a balancing act though. Raising rates too far or too soon could stall the economic recovery, and could be tough for markets to digest.

Bonds returned -0.92% over the past 12 months as the signs of inflation became more apparent. Inflation reduces the value of the cash flows that bonds pay to investors. It can also prompt central banks to increase interest rates, which in turn pushes down bond prices.

Today’s outlook for bonds doesn’t look as positive as it’s been in the past. Current bond yields give an indication of possible future returns. So today’s low bond yields suggest returns could be low in the future. Remember though, yields are variable and not guaranteed.

However, that doesn’t mean bonds should just be cast aside. We still think bonds have their place in a diversified portfolio, smoothing out the ups and downs compared to only investing in shares.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. Investments can rise as well as fall in value, so you could get back less than you invest.

How have mixed and total return funds performed over the past year? (% growth)

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/10/2021.

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
IA Flexible Investment 10.93% -2.34% 7.57% 0.41% 21.04%
IA Mixed Investment 0-35% Shares 4.40% -1.29% 5.94% 0.19% 7.20%
IA Mixed Investment 20-60% Shares 6.96% -1.84% 6.77% -1.82% 14.60%
IA Mixed Investment 40-85% Shares 10.10% -1.72% 8.20% -0.91% 19.97%
IA Targeted Absolute Return 3.35% -1.92% 2.54% 0.47% 6.56%

How have mixed and total return funds on the Wealth Shortlist performed?

Our Wealth Shortlist funds have delivered different returns over the past 12 months. They have different approaches and objectives, so we don’t expect them to perform in the same way.

Remember 12 months is a short time frame when looking at how an investment has done. Past performance isn’t a guide to the future. Investments should be held as part of a diversified portfolio for the long term – by long term we mean at least five years.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Schroder Managed Balanced was the strongest performer over the past 12 months. It returned 22.54%*, which compares favourably with its IA Mixed Investment 40-85% Shares peer group average return of 19.97%.

As a ‘fund of funds’ it invests mainly in other Schroders funds, tapping into the expertise of several experienced managers. Between them they cover a broad range of investments, including global shares and bonds, and there’s lots of diversification on offer.

The best performing total return fund in the past 12 months was BNY Mellon Real Return. It returned 12.78%, well ahead of the IA Targeted Absolute Return peer group average return of 6.56%. The Real Return team form a view of the world and build the portfolio around themes they expect to develop over the long term. They lowered the fund’s risk in early 2020. Since then, they’ve significantly increased how much the fund has invested in shares and corporate bonds, which has so far helped performance but increases risk.

Pyrford Global Total Return was the worst performing Wealth Shortlist fund in these sectors, returning 7.69%. It invests much less in shares than many funds in the Flexible sector. Tony Cousins and his team aim to deliver a return above inflation, but they also place a lot of emphasis on delivering low volatility and minimal losses.

Their disciplined investment process has meant they’ve been cautiously positioned. Having less invested in shares than others has meant they haven’t benefited as much as share markets have risen. While it won’t shoot the lights out, the fund has been effective at cushioning investors from market falls, though it can still lose money.

Here’s how some of our Wealth Shortlist funds in these sectors have done. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Mixed Investment 40-85% Shares – annual percentage growth

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
Schroder Managed Balanced I Acc 9.36% -2.24% 7.06% 1.86% 22.54%
IA Mixed Investment 40-85% Shares TR 10.10% -1.72% 8.20% -0.91% 19.97%

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/10/2021.



Targeted Absolute Return – annual percentage growth

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
BNY Mellon Real Return U Acc -1.13% -1.19% 11.59% 2.41% 12.78%
IA Targeted Absolute Return TR 3.35% -1.92% 2.54% 0.47% 6.65%

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/10/2021.



Flexible Investment – annual percentage growth

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/10/2021.



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