Invesco Select: Balanced Risk Allocation 09 May 2019

IP Select Balanced Risk Allocation share’s (IVPB) objective is to provide an attractive total return in differing economic and inflationary environments, with low correlation to equity and bond markets. The trust has a benchmark of LIBOR +5% per annum, which has been met over almost all periods, with volatility of around two-thirds of that of equity markets since the strategy was adopted in 2012.

In contrast to ‘active’ total return funds (such as Ruffer, Personal Assets etc.) the managers have a systematic process to shift tactically around an otherwise relatively static long-term allocation to three asset classes: debt securities, equities and commodities. The team has been running the strategy since 2008, and currently manage over $25bn for various mandates.

IVPB invests through highly liquid futures, and looks to allocate risk (rather than capital) equally across the three asset classes. By overweighting the allocations to the less volatile asset classes (such as bonds) and underweighting the allocations to the more volatile asset classes, an equally risk weighted (‘risk parity’) portfolio is created. Because each asset class earns a risk premium over the long term, and they are each uncorrelated to each other, the combination results in a portfolio with significantly improved risk / return characteristics than when compared to any one asset class.

IVPB sits within the AIC Flexible sector, which as one might expect, has a fair variety of strategies in it. We compare performance relative to some of the better-known trusts that exhibit low equity correlation and find that over the past three years, IVPB has generally been amongst the better performing, behind only Capital Gearing Trust in our sub-set of trusts. IVPB has achieved these returns with correlation to the MSCI ACWI index of 0.75.

The board has a zero-tolerance discount policy, which has successfully prevented the discount from deviating far from the board’s target of +/- 2% of NAV. At the time of writing, the shares currently trade on a discount of 0.6%.

An additional feature is the ability of shareholders in any of the IP Select Trust's share classes to switch into another IP Select share class on a quarterly basis (UK Equity, Global Equity Income and Cash). This is conducted on or around 1 Feb, 1 May, 1 Aug and 1 Nov each year and is deemed a non-taxable event by HMRC as regards capital gains tax.

In contrast to ‘active’ total return funds (such as Ruffer, Personal Assets etc.) the managers have a systematic process to shift tactically around an otherwise relatively static long-term allocation to three asset classes: debt securities, equities and commodities. As such, the systematic approach means investors should be able to have a good understanding of how the strategy will perform in different environments, and therefore offers an interesting complement to many of the popular balanced, or low equity correlation, total return funds.

The trust has performed well relative to other funds with low equity correlation in the Flexible sector. Certainly 2018 was a tricky time for all asset classes, but over the medium to long term it has performed well in absolute terms with volatility of 5.6%, relative to the target of 8% and equities of c.10%.