Why defence is the best form of attack

Capital markets were challenging to navigate in 2020, but it was possible to deliver a positive return primarily driven by resilient income; the Diversified Income Fund (DIF) did so for an eight consecutive year. In our view, DIF’s approach to seeking defensive returns with relatively lower volatility makes it a reliable core holding in an investor’s portfolio, especially in the current environment.

Jan 26, 2021

8 minutes

Jason Borbora-Sheen
Ellie Clapton
Capital markets were challenging to navigate in 2020, but it was possible to deliver a positive return primarily driven by resilient income; the Diversified Income Fund (DIF) did so for an eight consecutive year. In our view, DIF’s approach to seeking defensive returns with relatively lower volatility makes it a reliable core holding in an investor’s portfolio, especially in the current environment.

The fast view

  • DIF aims to offer both downside protection and upside participation
  • The Fund adopts a total return approach, using income as the engine
  • This is in stark contrast to underperforming absolute return strategies
  • We believe DIF’s approach makes it a reliable core holding

Capital markets were challenging to navigate in 2020, but it was possible to deliver a positive return primarily driven by resilient income; the Diversified Income Fund (DIF) did so for an eight consecutive year, offering protection during weaker markets in addition to upside participation; this versatility is down to three core elements of its philosophy.

The Fund adopts a total return approach, using income as the engine of performance; our process is straightforward but effective, enabling us to protect against the downside; and finally, our process is aided by the ability to invest across a wide variety of asset classes with a flexible toolkit. DIF’s performance is in stark contrast to absolute return strategies which – despite their goal of delivering positive returns irrespective of market conditions – have performed poorly in recent years; such funds are often complex and open to excessive volatility, in our view.

We believe DIF’s track record of delivering defensive returns with relatively lower volatility makes it a reliable core holding in an investor’s portfolio, especially given the current volatile backdrop and lofty valuations.


DIF has provided downside protection during market drawdowns, and swiftly recovered any weakness

dif-positive-year

Past performance is not a reliable indicator of future results, losses may be made.
Calendar year % returns for the Fund UK equities, defined as, FTSE All-Share Total Return (GBP) and IA Targeted Absolute Return Sector Average, respectively: 2020: 4.56, -9.82, 3.70. 2019: 5.37, 19.17, 5.12. 2018: 0.41, -9.47, -2.97. 2017: 4.82, 13.10, 3.89. 2016: 5.92, 16.75, 2.18. 2015: 1.97, 0.98, 2.30.

Source: Morningstar, 31 December 2020. Performance is net of fees (NAV based, including ongoing charges), gross income reinvested (net of UK basic rate tax pre 5 April 2016) in GBP. Chart shows peak to trough performance during drawdown episodes. For further information on indices, please see the Important Information section.

*FTSE All-Share

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General risks

The value of investments, and any income generated from them, can fall as well as rise. Past performance is not a reliable indicator of future results.

Specific risks

Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Government securities exposure: The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the Fund’s prospectus.

Authored by

Jason Borbora-Sheen
Portfolio Manager
Ellie Clapton
Portfolio Specialist

Important information

This communication is not for general public distribution and is intended for institutional investors and financial advisors only. It is not an invitation to make an investment nor does it constitute an offer for sale. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

The full documentation that should be considered before making an investment, including the Prospectus and Key Investor Information Documents, which set out the fund specific risks, is available from Ninety One. The fund is a sub-fund of the Ninety One Funds Series range (series i - iv) which are incorporated in England and Wales as investment companies with variable capital. Ninety One Fund Managers UK Ltd (registered in England and Wales No. 2392609 and authorised and regulated by the Financial Conduct Authority) is the authorised corporate director of the Ninety One Funds Series range.