I’m a “Balanced”​ investor. Are my returns “Balanced”​? Or “Mediocre”​?

I recently inherited a client from another Financial Advisory firm in Singapore. After being assessed as having a “Balanced” risk profile, the client’s pension had been fully allocated in January 2017 to a “Balanced” fund of funds.

For those of you unfamiliar with this particular type of investment, a “fund of funds” is a single fund (let’s say managed by fund manager “X”) which holds multiple underlying funds and ETFs within it (e.g. 20 funds, each with their own manager). It then becomes fund manager “X”‘s responsibility to maintain the right mixture of underlying funds so as to suit a particular client risk profile (“Cautious”, “Balanced”, “Adventurous”); effectively the financial advisor is delegating this part of his role to fund manager “X”, at the cost (to the client) of fund manager “X”‘s charges.

For a financial advisor, allocating a client’s portfolio in this way to a single fund (of funds), based on the client’s risk profile, would seem to be a simpler solution than constructing a portfolio by selecting and buying the 20 underlying funds himself. However, clearly this is only a good approach if due diligence has been performed to ensure that the fund (of funds) performs adequately for its intended purpose (and specifically, justifies the client paying the two layers of fund management charges involved).

As I’ve described previously (https://michaeldavidson.life/uk-expats-are-you-getting-the-returns-you-deserve/) the simple method of assessing how a portfolio “should” have performed is to compare it with a relevant benchmark (in this case, the PIMFA “Balanced” benchmark). This was the underwhelming result, for this client’s case:

Over the 2+ year period, the investment had underperformed the benchmark by 5.32%, with a particular divergence vs. benchmark from around mid-2018.

So, did the fund (of funds) maybe have an unusually bad couple of years in isolation? Apparently not, when looking at performance over a longer period:

Hence, if my client had been in this allegedly “Balanced” investment for 7 years, he would have underperformed the “Balanced” benchmark by 51.3%.

Is your portfolio delivering similarly “Mediocre” returns despite its “Balanced” label?

Written by Michael Davidson