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By Wesleyan

How market movements affect low to moderate risk funds

financial planning
5 min

There is no question that 2022 was a difficult period all round for investors in the lower to moderate risk multi-asset funds. We thought it was important to clarify why this is, and we hope you find the information we have provided here useful.

High-interest rates and market turmoil

The rise in interest rates caused a reaction in markets that subsequently depleted returns for the majority of investors in 2022 in the lower to moderate risk multi-asset funds. It is still being felt across investment markets today.

The reason it has affected these types of funds more than others is that they typically contain a higher mix of fixed income assets (such as government bonds and corporate bonds) along with equities and other asset classes.

The surge in interest rates (caused in no small part by rising global inflation rates and the announcement of the UK Government’s mini-budget in the Autumn of 2022) has caused the prices of fixed income assets to drop, and they haven’t yet fully recovered. Prior to this upheaval, bond markets had benefitted for many years from declining interest rates.

Equities overall have also performed poorly alongside bonds during the current market turmoil - going against the traditional belief that the two asset classes move in opposite directions.

Like other investors in the market, the fall in bond markets has affected the performance of our lower risk funds and, to some extent, our moderate risk funds (such as the Wesleyan With Profits Fund).

The situation described here is not exclusive to Wesleyan and is being felt across the industry as a whole.

A markets’ overview from our Fund Managers

At Wesleyan, our Fund Managers take the positives that come out of a downturn in investment markets as it presents the opportunity for us to take advantage of lower priced assets. When it comes to getting a good deal, they are no different, in some respects, to ‘savvy’ shoppers. With support from our Investment Analysts, our Fund Managers will scan the markets and look for assets that they feel will bring us potentially higher returns in the future.

As a consequence, we are now seeing better investment opportunities in bond markets as we purchase low-priced longer-dated bonds and hold them in the expectation that future returns may be higher in the years ahead. For example, longer-dated UK government bonds have recently offered investors, like us, yields of more than 5%. That is a far more attractive proposition than a couple of years ago, when long-term yields were often less than 1%.

Keeping a 'cool head'

The turmoil we saw in bond markets in 2022, is still very much prevalent as we approach the end of 2023. Concerns remain over high inflation, but our Fund Managers were pleased to see that the Bank of England’s Monetary Policy Committee (MPC) held UK interest rates at 5.25% in November. We think rates will be held at this level for some time - which should help to calm markets.

We are also watching the ongoing conflict in the Middle East closely as that could impact markets all over again as the situation unfolds. It is important to stay focused at times like these and to remember that if your money remains invested, it is able to take advantage of opportunities as and when they arise as it will be in the right place at the right time – otherwise known as ‘time in the market’. Your Specialist Financial Adviser at Wesleyan Financial Services will be able to provide more details on this.

Investing with the future in mind

As we mentioned at the beginning of this update, it has been a tough couple of years for investments returns overall but it is worth re-iterating our long-term investing stance here at Wesleyan.

Our funds are designed as long-term investment products, specifically for periods of no less than five years and typically longer. This is our belief and strategy, and we do this precisely because markets can be very volatile over shorter time periods. It is worth remembering that investing for the long term gives your fund time to recover and grow.

Riding out the inevitable peaks and troughs of investing can mean that in some years your returns may be lower than in other, better years. When markets are volatile, there is always a risk that investors may get back less than they invested.

Investing versus cash

It may be tempting in the current economic climate to consider putting your money in cash deposit accounts that may be offering attractive rates of return. However, it is important to consider that the savings rates that are currently available may not be around in the medium to long term or beat inflation if the money remains there for a number of years.

Staying invested in a diversified fund means your money is able to take advantage of when markets change, and opportunities arise. Staying invested in a diversified fund, for example, means the equities, bonds, and alternative assets that make up that fund, are all good diversifiers that respond differently to market movements – helping to reduce the overall risk of your investment over time.

Money held in a cash savings account is not able to take advantage of these opportunities as the money is ‘out of the market’ at the time they occur. It is also worth remembering that cash is often viewed as a short-term savings plan and is not necessarily suited to the long-term investor looking for potentially higher returns in the years ahead. If you haven’t done so already, your Specialist Financial Adviser from Wesleyan Financial Services will be able to talk to you in more detail about your investment.

Our heritage and financial strength

Wesleyan has been in business for over 180 years, and as a financially-strong mutual, we have weathered financial turmoil many times over. With this in mind, our award-winning team of Fund Managers, Property Managers, Investment Analysts and Sustainable Investment Analysts continue to keep a close eye on market movements - not least, the ongoing war in Ukraine and the latest developing crisis between Israel and Hamas.

We understand it is a worrying time for everyone, but you can rest assured that at Wesleyan, we will continue to invest your money wisely and always with a long-term view in mind.