CMC Invest
16 November 2023
Key points
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Important: This information is for guidance purposes and may become out of date at any given time. It is not investment advice. Investments can rise and fall in value. We won’t make an assessment of whether the investments you choose are appropriate or suitable for you. If you are unsure of the suitability of any investment, investment service or strategy, you should seek independent financial advice. Past performance is not a reliable indication of future returns.
Sometimes, when you purchase a stake in a mutual fund, it’s clear from the name of the product what you’ll be invested in.
Small-cap equity funds invest in small-cap stocks. A FTSE 100 tracker fund seeks to replicate the performance of the FTSE 100. An investment-grade bond fund – you guessed it – offers exposure to investment grade bond.
Sometimes, however, the names of mutual funds don’t always make it clear what securities the manager will invest in. This information is normally readily available from fund managers, but we’ve compiled some brief descriptions of certain strategies you may come across on your investing journey. This way, you’ll have a rough idea of what to expect when researching investment products in more detail.
As the name suggests, income funds seek to provide investors with income – often paying out a distribution on a monthly or quarterly basis.
To be in a position to pay out a distribution to investors, these funds will most likely invest in income-producing assets. Think corporate and government bonds, preferred shares and dividend-paying stocks.
Sometimes the name of the fund will also include an indication of what types of investments the fund manager will be making. For example, it’s not uncommon to find “income equity” and “income bond” funds. In all instances, however, it’s worth leafing through the fund’s documentation to understand how the fund intends to generate its income.
The clue is in the name with multi-asset funds. These offerings invest across asset classes, with managers given a broad mandate to allocate capital where they see fit.
So, instead of investing purely in equities or bonds, these funds may allocate to both at the same time. They may also have investments in assets such as real estate or commodities and may even have an allocation to cash.
The general idea is to spread risk across various asset classes. This theoretically means that when one asset class is underperforming, others step up to offset this. Overall returns, therefore, are steady and volatility is reduced.
Of course, this isn’t always the case in practice – investments in multi-asset funds can still fall in value. How effective a multi-asset fund is at delivering returns will also depend on its manager’s skill. It’s important, therefore, to check a fund’s documentation along with its track record, keeping in mind that past performance is not an indication of future returns.
Another offering where the name is somewhat self-explanatory. Managers who run multi-manager funds are tasked with finding other investment managers to oversee portions of the portfolio.
The idea is once again to spread risk. Maybe one manager is renowned for delivering returns in difficult market conditions. Perhaps another has a specialisation in small-cap or international stocks. By giving multiple managers a slice of the portfolio to look after, the fund may have potential to deliver returns in a variety of market environments.
Of course, if you’re investing in one of these funds, make sure you research each manager’s investing style and track record. And, once again, remember past performance isn’t an indicator of future returns.
Managers of absolute return funds seek to make a positive return over a given time period – say three or five years. They’ll aim to do this regardless of market conditions.
A positive outcome is never guaranteed, but managers will use a variety of strategies – potentially including derivatives and alternative investments – to try and meet their objective. While absolute return funds aim to deliver returns in all market conditions, more complicated strategies do come with added risk.
Absolute return funds differ from multi-asset and total return funds. The latter two often try to avoid volatility and severe drops in performance by spreading risk across asset classes. They don’t look to generate a positive return in all markets.
Bond funds come in a variety of flavours. Many of these are easily determined by the fund’s name. “Investment-grade” bond funds invest in high quality corporate bonds. “High-yield” bond funds allocate to riskier debt which comes with higher periodic payments.
You may also come across unconstrained bond funds. These funds have a similar objective to absolute return funds – their managers will look to eke out a return over a set period, regardless of market conditions.
As the name suggests, managers have a significant amount of leeway when seeking this objective. They aren’t constrained by factors like geography, creditworthiness, or bond duration.
Recent years have seen an increase in people looking for investments that match their own values. As a result, there’s been an uptick in the number of investment funds seeking to marry investing and sustainability.
In addition to sustainable funds, you may also have come across ESG funds, ethical investing products and impact funds. All of these are slightly different. The one commonality, however, is that they seek to offer a proposition speaking to investors’ values in addition to generating returns. Investments will be selected not just based on the prospect of returns, but also based on how they gel with people’s social principles.
It should be noted that there isn’t a universal definition for any of these monikers. It’s crucial, therefore, that if you’re looking to invest according to your values that you read through funds’ documentation to understand how investments are selected (or excluded) from the portfolio.
You can read more on sustainable investing in our guide here.
Determining which funds are right for you depends on your personal circumstances, how much risk you’re willing to take and whether you want to be invested in several fund products or find more of a “catch-all” offering.
As with most things in investing, there isn’t a “one size, fits all” solution here. Some investors may be comfortable building their own portfolio, selecting a few funds focusing on different assets and strategies. Others may want to outsource this to a professional fund manager, opting for a multi-asset or multi-manager fund.
Ultimately, the more you understand about your risk tolerance, time horizon and financial goals, the greater change you’ll have of finding an investment product that works for you.
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