Volatility Managed and Mixed Asset

Outflows from mixed asset funds rose to £4.0 billion in 2023, up from £233 million in 2022. The Mixed Investment 20-60% shares sector bore the brunt of outflows after challenging performance in 2022, however, all the mixed investment sectors struggled to attract retail investor inflows, which is a marked contrast from the trend of the 10 years leading up to 2022 when flows averaged £7.7 billion annually. In contrast, the Volatility Managed sector remained in steady inflow through 2023, with net retail sales of £2.7 billion placing it as the best-selling IA sector for the year. Volatility managed funds typically map to the adviser risk profiling process. Less wealthy clients are often placed in a fund structure, which is cheaper because it does not include a discretionary fee, and shows a single line of stock so can be perceived as less compelling to clients than a portfolio of different funds. Even if advisers are using volatility managed funds for a specific client segment, we have seen remarkable sales consistency to the sector through a tough year for sales to the wider mixed sectors.

We can look under the surface of the volatility managed sector to see if there is a difference in sales to funds managed to high, middle or low volatility targets. The below chart shows flows to each of the three mixed investment sectors, alongside different strands of the Volatility Managed sector. While there is not a standard measure of volatility, funds within the Volatility Managed sector are sold as fund ranges and the data here has been subdivided according to – low, middle and high volatility. There has been a shift within the sector however as investors have increasingly opted for higher volatility funds.

Whereas previously investors had favoured the middle volatility funds within ranges, throughout 2023 and into 2024 the higher volatility funds have consistently been best-selling. Typically, the higher volatility funds within a range would be expected to have higher equity allocations with equities ordinarily expected to offer higher long term returns but with greater volatility. The preference for higher volatility matches the pattern seen in the mixed investment sectors, with the higher equity 40-85% shares sector remaining the long-term investor favourite. Often, we expect investors to show a middling tolerance for volatility but if advisers are using these funds for less wealthy clients, they may also be younger and building up their investment pots. This could mean that longer investment horizons and a higher appetite for risk is driving up sales to the higher volatility banded funds. Or simply that to generate a return above cash, investors and advisers are having to make judgments that are driving investors into higher risk rated portfolios.

The other notable trend in the mixed asset data is outflows from the balanced funds of the 20-60% shares sector, with a roughly equal mix of equities and bond. Funds in the sector have seen heavy outflows with £4.0 billion withdrawn in 2023 and a further £1.3 billion in Q1 2024. These funds have traditionally been used to shield investors from loses across market cycles but struggled in 2022 when both asset classes lost value in tandem as interest rates went up.