Cumming, who co-manages Psigma Income with Eric Moore and industry legend Bill Mott, says the team’s expectation of high inflation has held the fund back recently and meant that it missed out on last summer’s rally. The fund has a significant overweight in commodities and high-yielding defensives, which had a poor 2012, and an underweight in the UK domestic space, which rebounded well last year.
However, the manager says he is confident that the fund is well positioned for the long-term.
"The year 2011 was a very, very good one for the fund but 2012 was more difficult," Cumming explained.
"We are witnessing the greatest financial experiment in history: the implementation of ever more adaptable, innovative and unlimited monetary policy to get out of the crisis."
"We have seen statements from the likes of Mario Draghi saying he will do whatever it takes – almost 'over my dead body' sort of stuff."
"We don’t think this has or will solve the debt crisis, but we certainly underestimated the effect his words and actions would have and we didn’t really participate in the rally."
Performance of fund vs sector and index in 2012
Source: FE Analytics
Cumming believes fears of the UK enduring a Japanese-style deflationary period means that inflation will always be on the cards and that hedging against it should be a number-one priority.
One way the team has attempted to do this is by upping its exposure to commodities.
He commented: "We are positioning the fund so that we are protected against inflation – over 16 per cent of the portfolio is in oil & gas to hedge against it, as we think it is marked time until it happens. Over the long-term we are happy with this strategy but we are feeling its effects in the short-term."
"We also have exposure to gold via Newmont Mining African Barrick Gold, but it has been a frustrating year for commodities and they are trading at a considerable discount."
Royal Dutch Shell, BP and BG are all top-10 holdings. High-yielding defensive stocks in the top-10 include GlaxoSmithKline, Vodafone and British American Tobacco.
Psigma Income’s poor 2012 has led to its underperformance versus its sector and benchmark since launch.
According to FE Analytics, it is down 3.07 per cent since April 2007, falling short of the IMA UK Equity Income sector average and FTSE All Share by 12.49 and 21.5 percentage points respectively.
Performance of fund vs sector and index since launch
Source: FE Analytics
This puts the fund in the bottom quartile of IMA UK Equity Income over this period. On the plus side, Psigma Income has been less volatile than the index and sector.
Looking further back, Cumming explains that a high exposure to banks hurt the fund badly in the early years.
"When the fund was launched we had quite a large weighting in the financial sector," he explained.
"We held Northern Rock, for example. When it went bust we reacted quickly and though it did affect us dramatically – which dragged on performance – there is no doubt that we were protected from the full effect."
The fund now has only 4.28 per cent in the banks – an area that did very well last year.
Cumming says the current financial sector rally is unsustainable and that the excesses of the pre-banking crisis will reappear when the shares start trading at their tangible booking price.
He is also concerned about the high-flying UK consumer market.
"The UK consumer market is still a very difficult space," he added.
"Wages remain low and there has been no real pressure to see them increase. We have also seen child benefit changes go through plus another grab on pensions. We don’t think austerity measures will be a passing fad – even the Bank of England is expecting anaemic and disappointing growth."
"We don’t want to be party-poopers, but I think absolutely nothing can be solved by simply kicking the can down the road."
Psigma Income, which is currently yielding 4.19 per cent, requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.69 per cent.
In an interview with FE Trustnet last year, FE Alpha Manager Steve Russell also voiced concerns over high inflation.