However, when markets hit recovery mode investors are willing to take more risk so those managers with a value strategy often tend to do better. However Ian Rees (pictured), who runs multi asset portfolios at Premier such as the five crown rated Premier Multi Asset Distribution fund, says that trying to pick where we are in cycle now is a very difficult task.
As a result, he is pairing funds together for his equity allocation as he says there is nothing more frustrating than making the right call on the market, but getting your fund choice wrong.
“One thing we have found is the best way to gain exposure to a market is to blend styles; not growth and value, but quality and value,” Rees said.
“Instead of using a fund that displays both, we like managers that follow a certain discipline and can add alpha in different ways, then blend them together. It means that we are not betting on which style will be in favour.”
“The key is though that each fund should, over the course of a cycle, generate alpha for us.”
With that in mind, he reveals three of the pairs he is running at the moment to give him exposure to the UK, Europe and Japan.
UK – FP Matterley Undervalued Assets & JOHCM UK Opportunities
In the UK Rees uses FP Matterley Undervalued Assets fund, which is headed up by FE Alpha Manager Henry Dixon, for his value allocation and FE Alpha Manager John Wood’s JOHCM UK Opportunities fund for exposure to quality growth companies.
The funds have worked well in tandem in the past. For instance, an equally weighted portfolio of the two has not only vastly outperformed the FTSE All Share over the past five years, but it has also been a lot less volatile.
Composite portfolio vs sector and index over 5yrs
Source: FE Analytics
Rees says that Dixon invests in companies from all corners of the UK market that he feels are undervalued relative to their underlying asset base and the return on capital they are generating.
This style has meant the fund has performed strongly when markets have risen, but it has also meant it falls a lot further than the market during times of weakness.
For instance, it was a top quartile performer in the IMA UK All Companies sector, and beat the FTSE All Share, in 2009, 2010, 2012 and 2013.However, in the falling market of 2011, it lost 10 per cent.
JOHCM UK Opps has been very negatively correlated. Rees points out that Wood has a keen focus on capital preservation and tries to buy quality companies that are trading at an attractive valuation.
Due to his style, and as he isn’t afraid to hold high levels of cash, the fund has tended to lag when markets have spiked.
Nevertheless, in 2011 – when the FTSE All Share lost 3.46 per cent – it was the sector’s third best performer with returns of 4.28 per cent.
Japan – GLG Japan Core Alpha and Lindsell Train Japanese Equity
Having been the perennial underperforming developed market over the last 10 years, Japan has shown signs of bouncing back.
Spurred on by positive rhetoric from the government and weaker currency due to quantitative easing from the Bank of Japan, the Nikkei and Topix both delivered a return of close to 25 per cent in 2013.
However, Japanese equities have started 2014 and with the outlook relatively uncertain, he is using Michael Lindsell’s Lindsell Train Japanese Equity fund and FE Alpha Manager Stephen Harker’s GLG Japan Core Alpha fund.
“Harker’s fund is essentially large cap value,” Rees said. “The style he employs means that he will invest in large, liquid, but cheap because he wants value, companies.”
“As the quality of the companies he holds can vary, that is why we also use the Lindsell Train fund.”
“He is large cap quality. It is very low turnover and he invests in companies with good strong balance sheets and reliable earnings, however he is less valuation sensitive and looks more at the intrinsic value of the company rather than its current price.”
Like his UK funds, GLG Japan Core Alpha and Lindsell Train Japanese Equity have worked well in the past, as the graph below which highlights their relative performance against the TOPIX since Michael Lindsell’s fund was launched in March 2012, shows.
Relative performance of funds vs index since Mar 2012
Source: FE Analytics
While their returns have come at different stages, both funds have outperformed the index and the IMA Japan sector over that time.
Europe – Baillie Gifford European & F&C European Small Cap
European markets have been on roller-coaster ride over recent years. While concerns about a possible break-up of the eurozone had plagued the market, European equities have been on an upward trend since the summer of 2012.
Nevertheless, Rees isn’t putting all of his eggs in one basket and recommends taking a blended approach.
However, he is taking a slightly different approach with his European exposure than he has done in the UK and Japan.
“Ultimately, we want our exposure to be spread across the market cap spectrum,” Rees says. “The Baillie Gifford European fund is a large-cap fund while F&C European Small Cap fund, as its name suggest, invests lower down the market.”
The £145m Baillie Gifford European fund is managed by Thomas Coutts, Paul Faulkner and Stephen Paice and sits in the IMA Europe ex UK sector, while F&C European Small Cap is an FCA offshore recognised fund.
Given the recent risk on environment, it isn’t surprising that the five crown rated F&C fund – which is managed by Sam Cosh – has beaten the Baillie Gifford European fund over the last five years.
Performance of funds vs index over 5yrs
Source: FE Analytics
However, Cosh’s fund also outperformed the Baillie Gifford vehicle in the falling market of 2011, despite its losses of 4 per cent. Nevertheless, it did fall 20 percentage points further than Baillie Gifford European in the crash year of 2008.
