All four of the multi-manager funds, including the £1.5bn Schroder MM Diversity portfolio – are bottom quartile in their respective sectors over six and 12 months periods, and year-to-date.
Diversity has eked out a return of just 1.46 per cent over the past year, compared to over 5 per cent from the IMA Mixed Investment 20-60% sector. It has made a slight loss over six months, while the sector has made 3.11 per cent.
The £154m Diversity Income fund, which sits in the same sector, has done a little better, but is still bottom quartile over both periods.
Performance of funds, sector and index over 1yr
Source: FE Analytics
The two portfolios are officially benchmarked to beat inflation rather like an absolute return fund, but in practice they aim to outperform the consumer price index (CPI) by 4 per cent per annum over the medium-term, with a lower level of volatility than is typical from equity markets.
One year is certainly not the medium term, but performance has come off considerably of late, with Brookes (pictured) and co-manager Robin McDonald’s high conviction call on cash so far not bearing fruit.
The funds have been steadily building cash positions in the last year, on the basis that there is a significant lack of value in equities and more specifically bonds. Brookes told FE Trustnet last year that he’d rather avoid bonds altogether and use cash to offset to higher equity weighting.
Bonds have performed relatively well of late however, and certainly in excess of low yielding cash, hurting the Schroder MM range’s relative performance. FE data shows that the IMA Sterling Strategic Bond sector is up almost 5 per cent year-to-date, while IMA UK Gilts has returned 7.31 per cent.
Diversity currently has 33.5 per cent in cash while Diversity Income holds 28.2 per cent. The Schroder MM Diversity Tactical fund, which sits in IMA Flexible Investment and can hold up to 100 per cent in equities, has an eye watering 44.8 per cent in cash, while Diversity Balanced has a 42 per cent weighting. Both of these have also significantly underperformed of late.
Performance of funds and sectors over 1yr
Source: FE Analytics
Mark Dampier, head of research at Hargreaves Lansdown, says Brookes and McDonald’s call is extremely bold. While it may end up working for them, he says that they are taking a huge gamble.
“People might say that holding that much cash is defensive but in many ways it’s aggressive because they are doing something so different,” he said.
“Cash is so often lethal to a career.”
He points to ultra-bearish managers Philip Gibbs and Martin Gray, who recently left their posts at Miton and Jupiter after significant underperformance in recent years. Both had significantly high cash weightings, seeing them fall well behind their peers in the risk-asset rally since 2011.
Cash has, of course, made some careers. A high cash weighting in 2008 helped Ruffer’s Steve Russell and Troy’s Sebastian Lyon make money even as equity markets plummeted, though Dampier says they had “much more going on than just cash.”
Dampier says other bearish managers that have still managed to eke out positive returns without holding high levels in cash, such as Newton Real Return’s Iain Stewart and Russell, who runs the CF Ruffer Total Return fund.
Rather than sitting on cash, Brookes and McDonald could hold alternative strategies such as absolute return and hedge funds, but Hargreaves Lansdown’s Laith Khalaf has its draw backs.
“These would make the fund significantly more expensive, which is perhaps not what they are looking for,” he said.
Khalaf thinks that the Schroder team’s high cash weighting is absolutely fine, as long as investors know what they are getting themselves into.
“The more flexibility a manager is given to make decisions, the better,” he said.
“If you are backing the manager to make these kinds of calls for you, you have to be prepared for them to be expressive. It’s not out of the ordinary – if it was a pure equity fund doing it I might not be quite so happy, but this is a multi-asset fund.”
“There is always a big question about asset allocation calls. I think most would agree that putting a valuation is a lot easier than predicting what will be the best performing asset class, but these guys are being paid to make these kind of decisions.”
Khalaf says there is a risk that certain bearish managers get “stuck in a rut” and are unwilling to update their views. However, given that the Schroder team have only taken this view recently following a strong period between 2008 and 2013, he says they should be given more time before taking judgement.
He points out Gray, Lyon and Russell were too early when becoming bearish in the lead up to the financial crisis, but more than compensated for this in 2008.
While cash has so far worked against the pair, Brookes and McDonald have made a number of very successful calls in recent years. They switched out of defensive managers such as Neil Woodford and into those with a more cyclical focus like Sanjeev Shah just as risk-assets picked up in late 2011.
Performance of funds and sectors over 3yrs
Source: FE Analytics
This has contributed to their much stronger medium-term record; FE data shows that Schroder MM Diversity Income and Schroder MM Diversity Tactical are top quartile in their respective sectors over three years, though Diversity’s recent poor run has seen it fall into the second quartile over the period.