Invesco Select: Balanced Risk Allocation 14 December 2022

Invesco Select Balanced Risk (LON:IVPB) aims to deliver equity-like returns but with half the volatility of equity markets over a full economic cycle. It seeks to give some protection to investors from market falls and inflation, with exposures across growth, defensive and real return assets. As such, it fits squarely into the Flexible Investment sector and, although within a peer group that is characterised by the wide diversity of approaches to investment, IVPG occupies its own niche because of the very different way it invests and manages risk.

The investment process is very different to most other funds, which we explain in more detail in the Portfolio section. However, in summary, IVPB maintains a risk-balanced exposure to fixed income, equities and commodities and employs a systematic process to shift tactically on a monthly basis around an otherwise relatively static long-term strategic allocation to each of these asset classes.

This year, equities and bonds have detracted, but this has been offset by the commodity exposure which has mitigated losses. In the year to the end of November 2022, IVPB’s NAV is down 8.8% and the reference benchmark is down 15.3%. This compares with the MSCI World Index which is down 0.3% in GBP terms. From the adoption of the strategy in February 2012 to 30/11/2022, IVPB has generated compound NAV returns of 3.7% per annum (Source: Morningstar).

Despite a challenging year, IVPB has, historically, demonstrated its ability to deliver through several very different periods for financial markets. According to the manager, the strategy has shown explicit strength in historic bear market phases, with the fund having outperformed global equities by 8% on average during bear markets, since the strategy’s inception. The shares have recently seen a dramatic derating, with the Discount seeing a significant widening.

IVPB has exposure to liquid and global investment assets. However, IVPG’s exposure to the three main asset classes of bonds, equities and commodities is balanced by risk contribution, rather than capital invested. Because each asset class earns a risk premium over the long term and they are, generally, uncorrelated to each other, the combination results in a portfolio with significantly improved risk/return characteristics when compared to any one asset class.

In contrast to many other multi-asset strategies, the systematic approach means that investors can have a fair degree of confidence that performance will be predictable in any given scenario. However, by investing in equities for their growth potential, commodities for their ability to keep up with inflationary shocks, and fixed interest instruments (bonds) for their defensive qualities, it is not hard to see the portfolio as an ‘all-weather’ fund.

The strategy has proven itself to have delivered over a medium to long-term investment period, even if it does exhibit some exposure to market directionality over the short term. Investors may see IVPB as a solid, conservative core within an investment portfolio. Alternatively, it might be seen as a ‘volatility reducer’ for an existing portfolio, enabling investors to have a smoother trajectory of returns than might be achieved with a portfolio of more highly-correlated assets. Certainly, the strategy is more complex than many, but the current discount of c. 17% may present an interesting opportunity for long-term investors.