No investor wants a fund that underperforms, but a manager has to take calculated risks if they want to add genuine value. Neil Woodford’s decision to avoid soaring tech stocks in the early 2000s in favour of tobacco and Ruffer’s high weighting to cash, the Japanese yen and short-dated gilts in the lead up to the 2008 crash are just two examples of active management at its very best.
High conviction bets can work against fund managers, of course, and sometimes expose investors to far more single country or single asset class risk than they realise. If you’re holding a portfolio of funds, Charles Stanley Direct’s Rob Morgan (pictured) says you have to be mindful of the kinds of managers you have exposure to.
“You’ve got to be careful,” he said. “Of course fund managers taking bets is what you want, but when you’re invested in a manager who makes macro-led decisions you could find yourself to have a lot in one area and as a consequence you can encounter significant over or underperformance.”
“Some fund managers set limits on how much they can have in a certain area, but for others making these big calls is a big part of their process. You want those that have a good track record of making these punchy calls, of course, and make sure they are measured plays rather than punts.”
“That said, these things can always go wrong. If your portfolio is full of managers of this type, then you’ve got to keep up to date with changes of monthly fact sheets to make sure you’re not overly exposed to one area.”
With this in mind, here are four popular managers taking particularly punchy bets at the moment:
Neptune Global Alpha – 45 per cent in Japanese equities
Rob Geffen is well-known for taking significant regional bets, which has both worked for and against his funds in recent years. In the mid-2000s, an overweight in emerging markets contributed to significant outperformance for the likes of Neptune Global Alpha, but this worked against him in 2008, 2012 and 2013.
While emerging markets continue to have a big weighting in the £90m fund, the standout overweight position now is Japan, which accounts for a whopping 45 per cent of assets. This compares to just 8 per cent for the MSCI World index.
This has worked well for the fund in recent months, pushing it into the top quartile of its IMA Flexible Investment sector over the past year. Neptune Global Alpha is also top quartile over the past decade, though the graph below shows investors have had far from a smooth ride. Indeed, the fund is one of the most volatile in the sector over the period.
Performance of fund and sector over 10yrs
Source: FE Analytics
Geffen recently told FE Trustnet that he expects his Japanese overweight to persist, pointing to cheap valuations and the commitment to creating inflation as the most important reasons for his bullish stance.
The manager could well be right and investors with double-digit exposure to Japan could make big returns over the medium term. However, given the pain investors in the asset class have suffered over the past two decades or so, those who already have significant exposure via a dedicated Japan fund may be put off by Geffen’s allocation.
Margetts Venture Strategy – 69 per cent in Asia Pacific and emerging market equities
Toby Ricketts has a natural bias towards emerging markets, viewing them as the obvious choice for long-term investors.
His £87m Margetts Venture Strategy fund is the most aggressive of his suite of risk-targeted fund of funds, going some way in explaining why he has 69 per cent in emerging markets and Asia Pacific. Top-10 positions currently include First State Global Emerging Market Leaders, Fidelity Emerging Markets, Newton Asian Income and Fidelity Institutional South East Asia.
Performance of fund and sector over 3yrs
Source: FE Analytics
Ricketts’ natural preference for emerging market managers led him to significant underperformance in 2013, and has contributed to him being bottom quartile in his IMA Flexible Investment sector over three years. He told FE Trustnet back in mid-2013 he was still confident in emerging market returns for the year.
Emerging markets have bounced back this year, however, and the manager is ahead of his sector over the period and remains top quartile over 10 years.
Those looking for a multi-asset or even global equity fund to fit alongside an existing emerging market holding may be best steering clear of Ricketts’ portfolio as a result, unless they are happy having the vast majority of their money in the asset class.
Liontrust Global Income – 46 per cent in UK equities
There has been a big move in recent years among investors to diversify their income stream away from the UK. While we have some of the most established dividend-paying companies on the planet, a natural bias towards the domestic market could leave investors exposed if things take a turn for the worst.
IMA Global Equity Income funds have been a big beneficiary of the trend, with a number of products attracting hundreds of millions of pounds over the past three years.
While funds such as Artemis Global Income intentionally avoid the UK market to give investors an obvious diversification choice, others have significant exposure to the FTSE. James Inglis-Jones and Samantha Gleave’s Liontrust Global Income fund have the most at 46 per cent, with AstraZeneca and Next the duo’s two biggest holdings.
The £256m fund previously sat in the IMA UK Equity Income sector but moved into IMA Global Equity Income in 2013. Inglis-Jones, who has been manager since 2009, has retained significant exposure to the UK, however. Most of the funds he has run during his career have either been UK or European-focused.
The high weighting to UK companies has resulted in a very high correlation of 0.91 to the FTSE All Share over a three-year period. While it’s important to remember that the UK market is itself very internationally focused in its own right, investors looking for a product to diversify a UK-heavy portfolio may wish to look elsewhere.
Liontrust Global Income has had a difficult year, making bottom quartile returns of 3 per cent. It is ahead of its peers over three and five years, however, though has been consistently more volatile.
Premier Multi Asset Monthly Income – 21 per cent in property
Last on the list is Ian Rees and Simon Evan Cook’s £217m Premier Multi Asset Monthly Income portfolio, which sits in the IMA Mixed Investment 20-60% sector. The fund of funds has impressed since its launch in January 2009, achieving consistent outperformance with below average volatility from a total return point of view, whilst also delivering stable and rising dividends.
The fund started paying dividends monthly in January 2013, and has generated £1001.65 worth of dividends from an initial £10,000 investment over the period. The managers aim to maintain the payout each time at the very least, using anything left over to provide investors with a bumper payment at the end of the tax year.
Income earned from £10,000 investment since Jan 2013
Source: FE Analytics
One asset class the team is currently heavily invested in is commercial property, which has a 21 per cent weighting. Threadneedle UK Property and Standard Life UK Property are both top-10 holdings.
Evan Cook says he likes the predictability of income streams, which complements the objective of the fund.
He told FE Trustnet back in February that he felt property was cheap and likely to match the returns of equities in 2014. The asset class has done even better than he predicted, with the IMA Property sector delivering double digit returns year-to-date compared to a slight loss from the FTSE All Share.
Investors already heavily exposed to property funds may want to keep an eye on the weighting in Premier Multi Asset Monthly Income. Moreover, while not directly correlated, commercial property and residential property have tended to perform very closely in times of stress.
As Whitechurch’s Ben Willis highlighted in a recent interview, residential property is often investors’ biggest liability, meaning they should be wary of doubling up their exposure.
