Financial Planning
Balanced Funds in Tough Times
Investors in balanced funds have discovered over recent times that they are not immune to the world's economic woes. Many balanced funds are experiencing significantly reduced returns (and may continue to languish before times improve).
Let's look at what lies behind the current performance of these funds.
A balanced fund is a managed fund that invests across the major asset classes in a diversified manner. This equates to investing in a balanced mix of both growth and income assets that gives investors reasonable exposure to growth investments while reducing investment volatility.
The aim is to provide a balanced return, which smooths the more extreme market ups and downs. However, as they are largely market-linked, balanced funds are still essentially a medium to long-term investment and some shorter-term volatility must be expected.
A typical balanced fund would normally invest in 60% shares (both Australian and international), 10% property, 30% bonds (Australian and international) and cash. These proportions may vary according to the state of investment markets.
How have balanced funds performed?
Over the last 24-36 months most balanced funds have returned significantly less than investors had been receiving over the mid to late 1990s.
The single most important reason for this weakness in balanced funds has been the performance of international shares, which generally comprise about 25% of a balanced fund. International shares declined by 14.5% per annum over the last two years.
This was partially offset by positive returns from Australian shares, which averages 8.2% over the past two years, still below the average return see over the past decade.
Property has done well while fixed interest and cash have delivered more modest returns.
 Why have international shares performed so badly?
International shares have had two big negatives leading to negative performance:
 Firstly, the very strong bull market of the late 1990s left these markets significantly overvalued as US investors bought stocks with little regard to fundamental valuation persists, and is a continuing negative for the sector.
Secondly, the US economy has faltered with a slowdown in economic activity from the prolonged economic expansion of the late 1990s. The resultant weaker global economy has also had an impact on the performance of international shares, in the US and elsewhere.
These factors have lead to a period of lower performance in international investments.
The future for balanced funds
This period of weakness in returns for balanced funds has not fully run its course, with a real possibility of further falls in international shares. Australian shares are pricey but not as over valued as international shares. Modest returns are likely. Bonds and cash are likely to continue to deliver returns around 4-6%.
All in all, investors in balanced funds should expect more of the same with returns likely to come in below investors' expectations for the next 12 months.
Over the longer term however, well managed balanced funds should benefit from the eventual recovery in world sharemarkets and deliver the sound, balanced performance expected of then.
To find out how to make balanced funds work for you, call our nearest Police Credit Union branch to organise an appointment with a Bridges Investment Consultant.
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