Balanced approach to funds pays off

Every week, a professional investor tells MoneyWeek where he'd put his money now. This week: Jerry McLoughlin, director of Punter Southall Financial Management

With increasingly volatile markets brought about by the credit squeeze and the US subprime mortgage-market crisis, stability in investment portfolios is becoming more important.

We consider asset allocation as a key driver of the variability of returns. When building a client's portfolio, the asset allocation of the whole portfolio as well as the recommended funds is paramount.

Recently, more retail fund providers have launched total return' products, aiming to provide stable positive returns over a set period (including dividend income, interest and capital appreciation). This is often achieved using a multi-asset, multi-manager approach.

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Those looking for a low-risk fund with above-inflation returns could consider the Cazenove Multi-Manager Diversity Fund (tel: 020-7155 5566). It is in the cautious managed' sector and has an annual target of CPI + 4%. It has a diverse split of assets covering sectors such as UK equity, hedge funds, commodities, property, gilts and bonds; the underlying investment funds within each sector are all quality funds in their own right (for example, Invesco Perpetual Income, JPM Natural Resources and Aegon Global Bond).

Manager Mark Harries and his team left the fund recently and Robin McDonald was appointed. McDonald has previous experience at Insight and Gartmore dealing with portfolio construction and asset allocation but so far we haven't seen this affect returns.

We really like the low-risk diverse approach and ability to produce positive returns in most months, coupled with the asset allocation and underlying holdings which should continue to give the fund top-quartile performance. It currently has a four-star rating from Morningstar.

Not everyone has a cautious outlook and many understand that to achieve capital growth and high returns, risk has to be taken, especially over a longer timescale. For the more balanced investor the Schroder Multi-Manager Strategic Balanced Portfolio (tel: 020-7658 6000) also operates a total return philosophy with a diverse portfolio that should achieve higher returns than the Cazenove fund although with higher volatility.

Manager Andrew Yeadon is rated AA' by Citywire, and the fund has a four-star rating from Morningstar and a record of outperformance. In each quarter of the past three years, Andrew has beaten or matched the average manager in the sector; if you invested £1,000 in October 2004 it would now be worth £1,604, according to Citywire.

It has a multi-asset approach which can include derivatives, private equity and hedge funds. Within the equity holding, an overweight position in Asia and emerging markets has fared well. The expertise of the fund manager, asset allocation and underlying investments bode well for continued outperformance.

For those who want a more exciting investment, targeting higher returns, the New Star Tactical Portfolio (tel: +353 1853 8732) is one we've liked for a while. It runs an unfettered fund of funds' approach with a geographical breakdown covering Asia, Africa, Latin America and other emerging markets. The fund also holds commodities specifically, gold, uranium, and exchange traded funds (ETFs) tracking the prices of corn and natural gas. The diverse nature of this fund has helped provide excellent returns.

Fund manager Mark Harris is A' rated by Citywire and the fund has a four-star rating from Morningstar. Three year performance has also been excellent £1,000 invested in October 2004 would now be worth £2,047, says Citywire. What pleased us most was the fund's performance during recent market volatility over the past six months it has returned 9.23%, against the Equity Global sector average of 0.85%, according to Morningstar.