ClockWise: GMAP Defensive recognised at Fund Manager of the Year awards

We’re pleased to share that Royal London Asset Management was the winner in the Absolute Return and Managed 0-35% Shares Sector at the Investment Week Fund Manager of the Year awards 2024, for the Royal London GMAP Defensive fund.

The independent panel of judges who selected the fund from a short-list of the best performers cited superior risk management and lower peak to trough losses during the bond market turbulence of the inflationary post-Covid years.

We designed this fund with precisely these market conditions in mind. I’ve always liked the idea of a defensive fund that supplements a core bond allocation with modest exposure to equities, property and commodities – allowing exposure to be dialled up or down tactically, as required.

This is because, while fixed income investments have offered strong risk-adjusted returns over the long run, they are prone to periodic shocks when a sharp rise in interest rates leads to negative returns. Good examples occurred in 1994, 1999, 2009 and 2021/2. In each case, a sudden upsurge in growth or inflation upset the bond market but benefitted equities and/or commodities.

Chart 1: Typically equities and/or commodities perform well when bond markets decline

The Investment Clock model
Links the business cycle to asset rotation

Source: RLAM for illustrative purposes only. Data based on an analysis of business cycles between April 1973 and January 2024.

This behaviour is consistent with the Investment Clock model that links asset allocation to the global business cycle (Chart 1). Defensive funds investing only in stocks and bonds saw painful losses in the stagflation shock of 2022, in many cases suffering significantly larger losses than funds in the same range that were designed for investors with a high risk appetite. This is because gilts fell by more than 25% over 2021/2. Commodities, in contrast, rose by about 30% in sterling terms in both years and our active investment process meant we were tactically overweight for most of this time.

It may be that the inflation shock of the Covid pandemic was a one-off. We suspect not, with the transition to net zero, high debt levels and expansionist fiscal policy all pointing to further upside risks. We believe our active approach, more careful about bond exposure when interest rates are low and broadly diversified with inflation hedges like property and commodities, will continue to be effective for cautious investors in this new era of what we call ‘Spikeflation’.

Chart 2: A passive balanced fund mix compared to GMAP Defensive

New asset mix maintains broad diversification
When compared to a balanced fund

Source: RLAM as at 31 May 2024. * Includes UK, global and short-dated exposures.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

Investment Risk: The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.

Credit Risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default.

Derivative Risk: Derivatives are highly sensitive to changes in the value of the underlying asset which can increase both Fund losses and gains. The impact to the Fund can be greater where they are used in an extensive or complex manner, where the Fund could lose significantly more than the amount invested in derivatives.

EPM Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility.

Exchange Rate Risk: Changes in currency exchange rates may affect the value of your investment.

Interest Rate Risk: Fixed interest securities are particularly affected by trends in interest rates and inflation. If interest rates go up, the value of capital may fall, and vice versa. Inflation will also decrease the real value of capital.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Fund investing in Funds Risk: The Fund is valued using the latest available price for each underlying investment, however it may not fully reflect changing stockmarket conditions and the Fund may apply a ‘fair value price’ to all or part of its portfolio to mitigate this risk. In extreme liquidity conditions, redemptions in the underlying investments, and/or the Fund itself, may be deferred or suspended.

Liquidity and Dealing Risk: The Fund invests indirectly in assets that may at times be difficult to value, harder to sell, or sell at a fair price. This means that there may be occasions when you experience a delay in being able to deal in the Fund or receive less than may otherwise be expected when selling your investment.