Cautious investors look to multi asset sector

Multi asset funds are becoming a popular investment choice in 2010 with cautious investors who are seeking greater diversification in their portfolios and a return above cash and inflation.

It may have been a challenging time for markets but M&G's David Jane believes his unconstrained approach to identifying undervalued assets has been a key factor in the M&G Cautious Multi Asset Fund's strong performance over the past three years.  The fund is able to participate in rising asset values in the good times and preserve its capital from the worst of market downside volatility in the bad times. 

David Jane, manager of the M&G Cautious Multi Asset Fund, comments: "My investment philosophy centres on risk and reward. Managing a multi asset fund is about understanding risks in markets and constructing a well diversified portfolio that will manage the downside at the same time as offering clients a return above cash and inflation. Having a truly active asset allocation approach enables us to respond to actual correlations of assets and position the fund in line with market changes.

"I have recently reduced my emerging market exposure - particularly in China and Brazil - in favour of two other areas. The first is Japan, which was a big laggard last year, and the second is in the industrial space. During the latter part of last year I was also building up exposure to defensive areas of the market such as utility companies and pharmaceuticals."

Go global for investors seeking income

Buying shares of dividend paying companies is a proven strategy in the stockmarket and holders of UK income funds have been handsomely rewarded over the long run with competitive returns ahead of inflation.  The dividend culture is not unique to the UK however.   Equity income is a proven strategy worldwide and we believe that investors may be missing out on some excellent investment opportunities if they restrict themselves to the UK.

Stuart Rhodes, manager of the M&G Global Dividend Fund, says: "The most compelling argument behind income investing on a global basis is that it offers the flexibility of choice. Compared to the 1,500 companies listed in the UK, the global investor has 15,000 companies to choose from. Our aim is to identify companies with strong financial discipline that can provide a rising income stream over time - wherever they are on the planet. This is the essence of income investing, in our view, and the breadth of a global investment universe allows us to pick the best opportunities without any geographic constraints."

Opportunities still exist in the corporate bond market

Despite a very strong year in 2009, there is still value to be had from an investment in corporate bonds, particularly if investors choose a fund able to do the now much harder job of sorting the wheat from the chaff. Credit spreads, the extra yield offered by corporate over government bonds, fell dramatically for much of 2009, but current spread levels are still more than enough to compensate investors for the risk of default in many cases.

Richard Woolnough, manager of the M&G Optimal Income Fund, comments: "We saw a huge amount of tightening last year, but spreads remain wide in an historical context. I think you're still getting paid for taking credit risk because it is unlikely defaults will be as high as implied by current pricing, but you do need to do your research. Careful selection of individual credits will be especially important in this phase of the credit cycle, in order to avoid stocks and sectors prone to default or decline. This is particularly the case in high yield. Although there will be no let up in the volume of government bonds issued this year, the amount of corporate issuance should slow. That lower relative supply of corporates should be supportive of further spread tightening versus government bonds. And with interest rates set to stay low for a long time, corporate bonds remain attractive in my view."

He believes that importantly, funds with the flexibility to switch across government, investment grade and high yield debt, such as the M&G Optimal Income Fund, allow the manager to seek outperformance regardless of the economic background - offering investors one product to suit all their fixed income needs.

Commercial property set for recovery

Investor sentiment continues to remain buoyant, underpinning the positive momentum in the UK commercial property market.  Amid a marked improvement in investor sentiment, yields on prime properties (well-located assets that generate strong rental income) continue to contract. The market is broadening with good secondary property firming, but weaker properties, where the risks of insolvencies are greater, are likely to remain vulnerable - for now.  People are buying into property due to the attractive yields available, relative to government bonds and cash.

Fiona Rowley, manager of the M&G Property Portfolio, comments: "Despite the attractive yields offered by property, the market rally we are experiencing is not based on any material improvement in the underlying fundamentals for property.  Conditions in the commercial property occupier market remain challenging, as weak tenant demand is causing rents to fall - we expect rents, on aggregate, to continue to fall for another 12-18 months.  With the close correlation between GDP growth and rental income growth, investors should remain alert to the implications of an uncertain economic outlook. 

"While we believe UK commercial property looks good value, we expect to see the strong investment market rally that built throughout the fourth quarter of 2009 to cool off to a degree, as the first half of 2010 progresses.  As we move through 2010, investors will begin looking for early signs of recovery in the occupier market.  If the tentative signs of improvement in economic activity continue during the year, this should begin to feed through to the occupier market and bolster tenant demand for 2011."