Mixed funds generally deliver modest results. However, it can sometimes make sense to invest in these funds, which invest in equities, bonds, commodities and cash. Ali Masarwah, analyst and CEO of the financial services provider envestor, explains why this is the case.
6 May 2024. FRANKFURT (envestor).The popularity of mixed funds is puzzling at first glance. From 2010, mixed funds were literally flooded with investor money. In some years, they collected more money than equity or bond funds, which have far greater assets. Today, the large mixed funds on the market manage billions in assets. The Flossbach von Storch Multiple Opportunities, in all its variants, has over 35 billion euros, more than any equity fund. The DWS Concept Kaldemorgen has 14 billion euros, and even the now chronically unsuccessful Carmignac Patrimoine still has assets of over 7.5 billion euros.
The success of mixed funds seems puzzling because their record between 2008 and 2023 was anything but exhilarating. They did not keep pace with the performance of the equity and bond markets. This was rarely noticeable during upward phases, as even weak funds were able to achieve mid-single-digit returns.
The chart below shows the excess return of the three most important mixed fund categories: conservative, balanced and flexible mixed funds. On average, defensive balanced funds outperformed their benchmark indices in only four years between 2008 and 2023 (2009, 2017, 2021 and 2022) and balanced balanced balanced funds once (2022). Flexible mixed funds did not achieve this once.
Sell mixed funds, then? Not necessarily. There are good reasons to invest in mixed funds - but there are also some pretty bad ones. Let's start with the good reasons.
Mixed funds are a good choice when it comes to spreading smaller assets as widely as possible across different asset classes. Small investors often do not have the means to construct a sophisticated portfolio of shares and bonds - nor the expertise. Mixed funds are rightly referred to as the "little man's asset management". And because there are hardly any advisors left who can implement sophisticated equity-bond strategies on a fund basis for portfolios with four or low five-figure assets, mixed funds can be a passable solution.
Mixed funds can also be a good solution for investors who have actually sworn off securities investments due to bad experiences. Many investors invest too short-term and too tactically. They buy when prices have reached their highs and sell at their lows. Investors' experiences during the repeated financial crises of 2008/2011/2020 were particularly traumatic. Entrusting your money to a fund manager has been proven to reduce the so-called return or trading gap that arises when investors act tactically. Mixed funds smooth out returns and thus protect investors from themselves. In today's world, where trading apps are fueling investor activity - a trend known as "gamification" - stable, balanced portfolios are a better alternative to do-it-yourself portfolios that hit the wall at the next opportunity.
However, mixed funds are often a poor solution. As the chart above has already indicated, the opportunity costs of mixed funds can be devastating in the long term due to the often excessive costs of 2, 3 or 4 percent per year. Younger investors in particular, who still have 30 or 40 years to invest, should initially focus on high-yield equity funds or ETFs. Mixed funds should come into play when investors no longer have forever and the little money they have saved up should not be jeopardized by excessive risks.
Mixed funds are also not recommended for investors with high assets. Wealthy investors should invest directly in equity funds, bond funds and cash-related investments after determining their return targets and risk-bearing capacity and avoid the detour via mixed funds. We often find portfolios with ten or more different mixed funds. But a lot doesn't help much with mixed funds. Because these funds have the function of providing ready-made asset management, they already cover the most important asset classes. Anyone who invests in several mixed funds will therefore produce undesirable "doublers" and invest in funds that essentially do the same thing. This is known as false diversification. Important sources of returns, such as second-line stocks, emerging markets, corporate bonds and specialties such as structured bonds or themes such as infrastructure or alternative energies, are then sometimes left out. What remains is a market portfolio that is far too expensive and that would have already been covered by 2-3 low-cost equity and bond funds. Investors should therefore critically question whether they are really the right "type" for mixed funds.
By Ali Masarwah, 6 May, 2024, © envestor.de
Ali Masarwah is a fund analyst and Managing Director of envestor.de, one of the few fund platforms that pays cashbacks on fund sales fees. Masarwah has been analyzing markets, funds and ETFs for over 20 years, most recently as an analyst at the research house Morningstar. His expertise is also valued by numerous financial media in German-speaking countries.
This article reflects the opinion of the author and not that of the editorial team of boerse-frankfurt.de. Its content is the sole responsibility of the author.
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