The manager, who runs the Schroder MM range with Robin McDonald, has been cautiously positioned this year. Some 34.1 per cent of his £1.4bn Schroder MM Diversity fund is in cash and another 28.3 per cent is in alternatives - for example, his two largest holding are absolute return funds.
This cautious stance has led to underperformance over 2014 but the manager believes this will turn around when markets move into a more volatile phase over the coming 12 months.
Brookes recently told FE Trustnet: “I am asking our clients to be patient with us at the moment as we have just put in a fourth-quartile year, but I’m absolutely convinced I’m right - it just hasn’t worked yet.”
Here, the highly regarded manager explains why he is interested in these three funds as we move into 2015.
Invesco Perpetual European Equity
Brookes’ first pick is the £1.3bn, four FE Crown-rated Invesco Perpetual European Equity fund, which is managed by Jeffrey Taylor and sits in the IMA Europe ex UK sector.
It has made first-quartile returns over one and three years and is in the second quartile over five and 10. The fund is the 11th best fund out of 49 in the sector since Taylor took over the portfolio in January 2001, with a first-quartile return of 107.56 per cent.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
While Invesco Perpetual European Equity has been slightly more volatile than its peers over this time, it has experienced a higher number of positive weeks. It also boasts a lower maximum drawdown, which shows the loss an investor would have made if they bought and sold the fund at the worst possible moments.
Brookes said: “Many people may think that the recent travails in the European economy make this a risky choice for inclusion, but we believe that share prices in Europe reflect a lot of the bad news already, so perhaps even if things become less bad then perhaps investors may return and start to pick up some world-leading companies at pretty reasonable prices.”
“Jeff Taylor and his team have done a good job on behalf of their investors and we think this will continue for some time yet.”
The fund’s biggest geographical allocations are to France, Germany and Spain, with Novartis, ING, Allianz, Atlantia and Siemens its five largest holdings. Taylor has also recently increased the fund’s exposure to telecommunications and industrials, but trimmed its weighting to healthcare.
Invesco Perpetual European Equity has a clean ongoing charges figure (OCF) of 0.93 per cent.
Morgan Stanley Diversified Alpha Plus
This five FE Crown-rated fund launched in June 2008 and has raised assets to around the €6.8bn mark since then. It is domiciled in Luxembourg and resides in the offshore FO Absolute Return sector.
It focuses on global macro and thematic opportunities across different asset classes. It aims to have a low beta to risk assets, prioritising capital preservation and limiting the drawdown, especially in times of market stress.
Brookes said: “Managers Cyril Moullé-Berteaux and Sergei Parmenov invest in various asset classes where they not only expect the price to rise, but also fall, as the strategy also benefits from shorting assets.”
“The team has been managing investors’ money in this way for many years and has achieved good returns, even in volatile markets, which may make this an ideal fund given recent market movements.”
Lead manager Moullé-Berteaux has only headed the fund since September 2011 but over that time it has made a total return of 9.89 per cent, outpacing the 1.44 per cent gain of its average peer and placing it in the sector’s second quartile.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
These more aggressive returns have come at the expense of a higher volatility and maximum drawdown than its peers, however.
FE Analytics shows the fund’s annualised volatility is 10.35 per cent over Moullé-Berteaux’s tenure on the fund while its maximum drawdown is 10.91 per cent; in contrast, the sector's volatility is 4.14 per cent and its maximum drawdown is 5.68 per cent.
Morgan Stanley Diversified Alpha Plus has a 2.03 per cent OCF.
JPM Income Opportunity
This fund is Luxembourg-domiciled, but its manager Bill Eigen and his team run it from their base in Boston. It invests mainly in the fixed income markets and sits in the FO Absolute Return sector.
“Bonds were badly hit during the credit crunch, leading to them being oversold and very cheap. Bill and his team did an excellent job at investing in these bonds and made good returns for investors in the fund,” Brookes said.
“Moving six years forward to today and most bonds have done very well, and it could even be argued that they are looking fully valued. Bill and his team have already reduced their holdings in these bonds and are waiting for cheaper prices before reinvesting.”
Eigen has more than 55 per cent of his $8.6bn fund in cash as he believes the bond market could face devastation in 2015 when the Federal Reserve lifts interest rates. He also recently told FE Trustnet that he is incredibly nervous about the outlook for fixed income.
“We are getting to a point where it is really dangerous in the bond market. It’s not funny anymore. I look where rates are, I look where economic fundamentals are and I look at what central banks have done to these markets and I am the most nervous I have been in my career,” he said.
FE Analytics shows the JPM Income Opportunity fund has outperformed its average peer since launch in July 2007 with a 33.68 per cent gain. Over that time its volatility and maximum drawdown have been broadly in line with the sector but it has had fewer negative weeks.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The fund has an OCF of 1.2 per cent.
