Sunday, January 16, 2022

Fund rating: The M&G Episode Income is flexible, original and attractively priced

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Multi-asset funds offer the flexibility to invest in a wide range of styles, sectors, regions and assets

And after almost two years of ever-changing circumstances – having to decide whether or not I’ll risk seeing friends and family, book that flight and vacation, or just travel to the office – my brain seems to be on strike – just as I am need to think about making the most of all my tax breaks and investing in my ISA.

I don’t know about you, but I think I have decision fatigue. Decision fatigue is caused by being forced to make too many decisions over a period of time – you weigh your decisions carefully at first, but then your mental energy is drained and you either make hasty decisions or can’t decide at all.

With thousands of resources available, it can be a daunting task to choose what’s right for you at the best of times, let alone in the middle of a pandemic when all seems uncertain.

Luckily, there is help for investors in the form of multi-asset funds. When done well, these funds can ultimately protect investors from market shocks by giving the manager the flexibility to invest in a wide range of styles, sectors, regions and assets. History shows that an extra layer of security is invaluable in times of real market uncertainty – and you get a professional investor to make all those decisions for you.

This week’s fund is a great example. The M&G Episode Income Fund aims to provide monthly income and long-term capital growth by investing in a diversified range of assets. He targets a cash return of plus four percent, with volatility managed through flexible asset allocation.

The term “episode” refers to those periods of time when an investor’s emotions cause them to act irrationally. Steven Andrew, who has managed the fund since its inception in 2010, uses behavioral finance to find nests of value and invest against the herd, rather than following them.

The fund’s investment process is designed to prevent the manager from becoming a victim of behavioral bias and the cornerstone of the process is identifying which income-generating assets currently appear attractively or unattractively priced and why.

Steven evaluates what he considers fair value for a wide range of assets around the world in light of historical expected returns, economic theories and investor preferences for each asset class.

He calls this “neutrality”. He then compares this neutrality to the real returns on those assets to create his valuation framework. When the valuation phase determines that certain assets are under- or overvalued, Steven tries to find out why. There may be a valid reason for the price movement, or it could be due to human behavioral factors.

The team identifies three factors that can help identify a behavioral event.

The first is over-focusing on a single story, ie when market participants focus their attention on a specific event and disregard other information.

Secondly, when there are contradictory reactions because the market is behaving differently than the economic development would suggest. After all, any rapid price movement in an asset class, whether up or down, suggests a rash reaction.

In the medium to long term, Steven would expect such mispricings to be corrected. Therefore, these behavioral episodes can create investment opportunities.

In addition to equities (currently 44.6 percent of the fund) and bonds (49.5 percent), the fund also has a small allocation to real estate (3.4 percent) and infrastructure (0.8 percent). The Fund’s flexibility is reflected in its recent decision to diversify equity exposure, reducing holdings in financials in the US and Europe and reinvesting in US and Asia, primarily in technology and healthcare companies, where the team believes that attractive opportunities arise from a period of underperformance.

When you look at this process, two things come to mind. First, we like originality, and this fund’s behavioral focus really sets it apart from its peers.

Second, and perhaps more importantly, the process has proven itself in various market conditions. Since inception, the fund has returned 107.4 percent to investors, compared to 72.6 percent for its average peer. Over the year it has returned 9.9 percent versus 6.3 percent for the sector average.

With an ongoing fee of 0.65 percent*, the fund is also attractively priced for a multi-asset vehicle.

*Source: Fund factsheet, 30 November 2021

**Source: Fund factsheet, 31 October 2021

***Source: FE fundinfo, total returns in sterling terms, M&G Episode Income and IA Mixed Investment 20-60% Shares sector average, 11 November 2010 to 6 January 2022

^Source: FE fundinfo, total return in sterling, sector average M&G Episode Income and IA Mixed Investment 20-60% Shares, 6 January 2021 to 6 January 2022

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