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The funds Mike Deverell holds in his ISA portfolio

05 July 2014

In the next article in the series, the AFI panellist explains why he has exposure to property, bonds and Japanese equities through active funds, but has bought passives for three other popular markets.

By Daniel Lanyon,

Reporter, FE Trustnet

Mike Deverell, investment manager at Equilibrium, is upping exposure to commercial property in his ISA as well as taking a more bullish position on Japanese equities.

ALT_TAG Deverell says exposure to commercial property via five funds has boosted the value of his ISA over the past year as the UK recovery has gained momentum.

His ISA reflects the make-up of Equilibrium’s balanced portfolio, which he manages for a number of clients.

“My biggest overweight is property, making up approximately 25 per cent of the portfolio,” he said. “It is an asset class we really like.”

“The UK economy is recovering which is great for commercial property. The actual capital value of property has increasing dramatically over the past year.”

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Source: FE Analytics


“The price of commercial property is very much linked to what is happening in the economy, so it has a really strong correlation to economic growth. With the economy currently gaining momentum, it is a very positive sign but most of the gains are made from rental income which is still quite strong and growing. We have also seen rents increase recently.”

As the table shows, Deverell’s 25 per cent in property is split equally across five funds: Aviva Investors Property Trust, SWIP Property Trust, Henderson UK Property, Ignis UK Property and Standard Life Investments UK Property.

All five funds have made consistent returns of between 10 and 15 per cent over the past year, after several years of flat performance.

The SWIP Property and Ignis UK Property funds have both failed to beat the average return in the sector over this period, but have still managed healthy returns.


Performance of funds and sector over 5yrs

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Source: FE Analytics


Whilst Deverell is holding his ISA to deliver capital growth over the medium term, he says he wants to have some flexibility to access cash should he need it. For that reason, he has a sizeable portion of his ISA in money markets.

He also has a high degree of exposure to bonds [13 per cent], which are less likely to suffer sudden falls than equities. Deverell points out that his property exposure also helps to dampen volatility.

“Property is an asset class we expect to like for at least the next 18 months.

We won’t invest in property shares or REITS, because they just all act like equities and therefore don’t diversify your portfolio,” he explained.

“As we hold physical property funds, there are potential liquidity issues if money started coming out, but that isn’t a big issue now because the sector is seeing inflows. It is something you need to watch carefully though.”

Deverell holds almost 6 per cent in Japanese equities via two funds: Schroder Tokyo and Baillie Gifford Japanese.

“The funds have had a bit of a negative effect in the portfolio in the last couple of years but in the past few months it has come back and started to do very well,” he said.

“Japan has started to look cheap and earnings have been growing quite fast and we think they we’ll continue to do so. It is probably our favoured market, though we realise there is also a risk premium attached to it.”

Deverell likes the US market but has chosen a tracker for exposure: the Vanguard US Equity Index fund.

“We have not been able to find a manager who cans consistently outperform the index; I think a lot of people are coming around to that point of view,” he said.

Deverell also holds passive funds for exposure to emerging markets and UK large caps via the Vanguard Emerging Markets Stock and Vanguard FTSE UK Equity Income portfolios.

The largest single holding in the fund is CF Odey Absolute Return which makes up 7.34 per cent of the portfolio. It has now soft-closed to new investors.

James Hanbury’s fund has an impressive track record and is the best performer in its IMA Targeted Absolute Return sector over three and five years.

However, it has faltered in recent months and is down almost 5 per cent year-to-date.

Deverell is unconcerned however, as he doesn’t class it as a run-of-the-mill absolute return portfolio.

“It has had a terrible few months but we class it as having similar risk to an equity fund,” he said. “It just happens to take short positions as well as long positions.”

“We don’t really like the term absolute return, especially for this fund because we think it has equity-like risk. It has done much better than a lot of equity markets though.”

“It has had a really good effect on [my ISA] over the last 18 months, so you have to take the rough with the smooth.”


CF Odey Absolute Return has returned 68.81 per cent over three years, compared with 8.39 per cent from the IMA Targeted Absolute Return sector average and 29.64 per cent from the FTSE All Share.

Performance of fund, sector and benchmark over 3 yrs

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Source: FE Analytics


Deverell has kept some exposure to fixed income via three bond funds, though is generally quite negative on the returns of the asset class, seeing it instead as a tool to dampen volatility.

He believes rising interest rates will present a big problem to bond managers, which is why he’s chosen managers with a highly flexible mandate.

“All of my bond funds are quite short duration which means they have low sensitivity to interest rate rises. They can all go anywhere and should be better placed than most when rates do start to rise,” he explained.

“Our favourite is Twenty-Four Asset Management Dynamic Bond, which is a really good fund. It could benefit from what is happening in Europe – especially if the ECB starts buying asset-backed securities. If that happens, that is a market that could do really well.”

Deverell says it’s important to run his ISA in line with his clients’ portfolios.

“The [balanced] portfolio is obviously something that we believe in, which is important,” he finished.

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