The manager of Thesis Optima Balanced and Thesis Optima Growth aims to carry an equal quarter of his portfolio in each category, adding new contributions several times a year to keep the balance as different funds grow at different speeds.
Richards (pictured) says he is happy to ride out market volatility, as he anticipates contributing to his pension without drawing down for approximately 20 more years.“During such times, I will take advantage of oversold areas by rebalancing, whilst with regular payments into my pension through my salary, I tend to invest in the theme that’s performing the weakest and lagging at any moment in time,” he explained.
“Also, having been in the industry for 20 years, I believe I can see through trends and stories, and so my investing is based on a philosophical view of what I truly believe,” he said.
“The equal weighting is so that I can let the different performance cycles of each area/theme play out relative to each other and allow me to rebalance if one performs better/worse than another.”
Standard Life GARS
This popular fund makes up a quarter of Richards' pension portfolio.
“This is one of probably fewer than five funds I would trust to deliver me that steadier risk-adjusted return profile that acts as the ballast to a well-constructed portfolio. There are pretenders and those with stronger short-term histories, but Standard Life’s GARS fund has stood the test of time and market conditions.”
“It plays hedge fund strategies like relative value trades, but in a well-considered framework with risk as the primary driver rather than return. The strategies, despite being played mainly through derivatives, are easy to understand and conceptualise, and there are no elements of financial sorcery.”
The £20.6bn fund has returned 49.94 per cent since launch in June 2008, representing an annualised return of more than 7 per cent.
Performance of fund and index since June 2008
Source: FE Analytics
Our data shows the fund has delivered a positive return in each calendar year since its launch and is currently up 1.44 per cent in 2014.
Rob Gleeson, head of FE Research, recently increased his exposure to the fund to one-fifth of his pension portfolio, saying it is an ideal option for investors waiting for a buying opportunity in riskier assets.
However several commentators, such as Equilibrium’s Mike Deverell, have recently sold out of GARS due to concerns over size and high-profile manager exits.
Private equity
Richards says exposure to unlisted companies gives his portfolio an early bite of the value chain.
“Many people liken private equity to investing in small caps, but in reality, many private equity managers are invested in very large companies. These will on the whole be private companies, either companies taken private from public listing or companies that are not listed but perhaps aim to be.”
“Private equity portfolios can be really diverse, ranging from high growth start-ups to mature businesses in turnaround situations. Managers can deliver their alpha through their ability to effect change, as they are often a large investor among a small overall number.”
“The unquoted nature of their portfolios means that the share prices of the trusts I invest into are less correlated with public equity markets and they do not suffer as much from the day-to-day noise, as NAV updates are typically half-yearly as opposed to daily.”
Richards uses five investment trusts to gain exposure to the asset class: Electra Private Equity, Graphite Enterprise Trust, Neuberger Berman Private Equity, Candover Investments and HarborVest Global Private Equity.
The trusts have largely outperformed the IT Private Equity sector average over the past five years, apart from Candover which has made a loss of 1.37 per cent.
However, it has performed strongly in 2014, returning almost 50 per cent.
Performance of trusts and sector over 3yrs
Source: FE Analytics
Global smaller companies
Richards says that over the longer term, smaller companies tend to outperform larger ones. He likes using small cap portfolios with a global mandate as there is greater scope to find under-researched and therefore cheaper companies.
“Approximately two-thirds of globally listed companies are ‘smaller’ companies. Smaller companies provide greater exposure to economically sensitive sectors and therefore it is a truism they do better during times of recovery or strong economic growth,” he said.
“Additionally, smaller companies are typically not well researched by the analyst community, which gives fund managers with the time and resources to devote to this area a greater opportunity to demonstrate the alpha they can add.”
Richards holds two funds for exposure to global smaller companies: Baillie Gifford’s £148m Global Discovery fund and Invesco Perpetual’s £568m Global Smaller Companies fund.
Both have outperformed their IMA Global sector average over three years, with Baillie Gifford Global Discovery doubling its gains.
Performance of funds and sector over 3yrs
Source: FE Analytics
Richards says his exposure to global small caps allows him to invest in companies through the most rapid part of their growth phase.
“Perhaps this is driven by the fact that in the first instance, the big new industries or areas of commerce of the future are small companies today.”
“If one believes earnings drive markets and there’s good correlation between earnings and market performance, over the long-term smaller companies have exhibited stronger earnings growth than larger companies.”
Thesis Optima Growth
Richards reserves the final quarter of his portfolio for his own £20m Thesis Optima Growth fund, which he says is his core long-only equity play.
“Through Thesis’ Optima Growth fund, I access Thesis’ active asset allocation process as well as the fund selections of the team I head.”
“I am thereby indirectly invested with many of the up-and-coming boutique fund managers that we have selected, as well as stalwart names who’ve proved themselves through time.”
The fund of funds has narrowly outperformed its sector average over the past five years, returning 64.9 per cent.
Performance of fund and sector over 5yrs
Source: FE Analytics
“I get no special deals on the unit class in which I’m invested and so I am paying the fee of the fund alongside current investors and our interests align.”
