The aim of a “balanced” fund is to give diversified exposure across the major asset classes that each provide uncorrelated returns: typically fixed income government bonds, inflation-linked government bonds, equities, bank deposits and gold (precious metals). The targeted outcome is lower-risk, lower-volatility returns that a conservative investor – say, a pensioner – can depend on year in and year out. History highlights that returns from balanced funds lag those of equities (stock markets) over the medium- to long-term, but the trade-off is that a balanced fund investor shouldn’t wake up and find themselves down 10-20% in a year either!
Most balanced funds will have a significant weighting in government and corporate bonds. We have disagreed for some time with this approach, arguing that, with government bonds offering near zero yields (returns), government bonds had gone from being a risk-free source of return to a return-free source of risk. The key risk here is that, at very low interest rates, bond prices are miles above redemption prices in many cases, so that losses lie between here and the maturity of these bonds.
The chart on the right shows the Bloomberg Eurozone Aggregate Government Bonds Total Return Index. It measures the performance of fixed income bonds issued by European governments, including coupon payments reinvested.
Since the end of 2021, European fixed income government bonds have, in aggregate, delivered a total return of -12%. This has been the flipside of rising bond yields i.e. falling bond prices.
With equities also declining in value, this has been a painful experience for balanced funds, as they have lost an important source of diversification when it was needed most. But it was easy to anticipate, and we ourselves have been highlighting this risk for owners of balanced funds for some time.
If you are invested in balanced funds (part of a pension or personal account), consider having a conversation with one of our advisors. Our wealth management service can cater to any individual with over €500k in personal or pension monies.