The manager of the Cazenove Multi Manager Diversity fund (pictured) says that it’s important to hold “insurance policies” within a multi-asset portfolio, to ensure that you’ve got a margin of protection when markets take a turn for the worse. For this to happen, he says you’ve got to be patient with underperforming funds when the market rises, even if they’ve disappointed for three years – or more.
He points to FE Alpha Manager Philip Gibbs’ Jupiter Absolute Return fund, which has returned just 3.12 per cent since its launch in December 2009. This puts it way behind both its IMA Absolute Return sector average and inflation, and until recently, it was also short of its Libor GBP 3m benchmark.
“We’ve owned Jupiter Absolute Return for a long time. Philip is the archetypal bear market investor. He has delivered the bulk of his outperformance during bear markets during his career,” said McDonald.
“The problem is we haven’t been in one, but that’s not something that concerns me. Periodically his fund is down, but the last four years has not rewarded investors for shorting riskier assets. Markets have been underwritten by the Federal Reserve, which has reacted very quickly every time things have taken a turn.”
Performance of fund versus sector and indices since launch
Source: FE Analytics
“We have great sympathy with Philip’s cautious view. Besides, this fund is something of an insurance policy for us. He’s there for a goldilocks scenario – to get us out of trouble, or at least to help, when things turn very quickly.”
McDonald added: “If you view it as an insurance policy, it’s done its job. The next time the market pukes, then you’ll why we hold it. The big question mark is how long he will stay at Jupiter, rather than his ability.
The Cazenove manager says he would have been more concerned if the fund had shot the lights out over the period, because then it would be more likely to go down during a market correction.
Our data shows that Jupiter Absolute Return is one of the very few absolute return funds that have a negative correlation to the FTSE All Share over three years, at -0.4.
FE Analytics shows that the average absolute return fund has a correlation of +0.83 to the FTSE All Share.
Gibbs currently has a big short position in the bond market, and is also short Japanese equities and the euro.
As McDonald pointed out earlier, the manager’s strong long-term record can be attributed to his stellar record in falling markets. In 2008, he lost just 5.5 per cent, while his peer group lost more than 30 per cent.
Jupiter Absolute Return has a minimum investment of £500 and an ongoing charges figure (OCF) of 1.48 per cent, but also has a 15 per cent performance fee.
Here, FE Trustnet looks at two other funds that have arguably done their job in recent years, even though they’ve underperformed their peers and benchmark over the period.
Fidelity Enhanced Income
This is very different from the Jupiter Absolute Return fund, in that it’s a pure equity income fund that attempts to beat the FTSE All Share.
However, like the Jupiter fund, it does use derivatives. Manager Michael Clark uses call options on stocks, to enhance his portfolio’s level of income. Our data shows Fidelity Enhanced Income is one of the highest yielding funds in the IMA UK Equity Income sector at present [5.76 per cent.]
The derivatives strategy limits the fund’s ability to deliver capital growth though, which has contributed to poor relative total return performance versus its sector and benchmark since its launch in February 2009.
Performance of fund versus sector and index since launch
Source: FE Analytics
Head of research at FE Rob Gleeson still rates the fund very highly however, as he believes it has performed in line with its objective.
“The call options over the top ensure that the high level of income is quite sustainable,” he explained.
“The drawback is that it limits the overall growth potential of the fund so that during times like now when markets are rising quickly, it doesn’t do as well in a total return sense.”
“Essentially, you need to be clear what you want from the fund. If you want a consistent high level of income this is a good one to go for, but if you want a bit more growth potential, this probably isn’t the fund for you.”
Fidelity Enhanced Income has a minimum investment of £1,000 and an OCF of 1.74 per cent.
CF Miton Special Situations
While FE Alpha Manager Martin Gray detests the term “perma-bear”, it’s safe to say that his negative outlook on the global economy is set to endure for the foreseeable future.
He and co-manager James Sullivan don’t use a benchmark, but there cautious stance has seen them underperform their IMA Flexible Investment sector over a three year period.
Performance of fund versus sector over 3yrs
Source: FE Analytics
The pair have a high weighting to cash and bonds, and prefer to get exposure to equities via preference shares, in order to minimise downside risk. They can hold up to 100 per cent in equities, but at present they only account for 32 per cent of assets.
Though they’ve missed out on the equity rally, Sullivan says he has been encouraged by the reaction of investors, who understand why the fund has underperformed.
“I went to a market update with clients expecting to have to apologise for the performance of late, but I’d say nine out 10 investors were content,” he said.
“Many said: “I don’t buy Miton because I want a high beta strategy, I buy Miton because I want something I can rely on”, which was really pleasing.”
“We’ve been beating ourselves up a little, but the fund has continued to generate positive returns. It’s at its all-time high in terms of unit price, so that’s always a nice thing to see.”
CF Miton Special Sits has a minimum investment of £1,000 and an OCF of 1.84 per cent.