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The multi-asset funds avoiding the bond market

09 February 2015

A number of multi-asset managers have warned that bonds are at risk of correcting across the board in the years ahead, so FE Trustnet looks for the funds with the lowest exposure to this asset class.

By Gary Jackson,

News Editor, FE Trustnet

Multi-asset managers are growing increasingly cautious on the fixed income market, as yields stay stubbornly low and put a question mark over the traditional ability of bonds to offer protection during times of equity market strife.

Last week, a number of multi-managers told FE Trustnet that running a cautious multi-asset portfolio is becoming increasingly difficult as valuations in the bond market, especially when it comes to government debt, are looking stretched and prone to a correction at some point in the future.

Schroders’ Marcus Brookes (pictured), Rathbones’ David Coombs and Brooks Macdonald's Jonathan Webster-Smith all agreed that it is difficult to find compelling opportunities in the bond market and said they were making use of alternative investment strategies to offset this in their portfolios.

In a recent update, Brookes said he thinks the bond market is due a shakeup, given the economic outlook. He noted that the US has witnessed a “fantastic recovery” while a weaker euro, lower oil prices and less austerity create a promising outlook for Europe.

“The bond market needs to be pricing a different environment, which it really isn’t at the moment. It’s still fretting about deflation rather than focusing on the economic resurgence,” he said.

In the below study, we have looked through the two largest multi-asset sectors – IA Mixed Investment 20%-60% Shares and IA Mixed Investment 40%-85% Shares – to find out which funds are putting the most distance between themselves and the bond market, without necessarily piling into equities. To do this, we totalled up the percentage of assets they have in other investments such as alternative assets, property and cash.

The average Mixed Investment 20%-60% Shares fund has 33.30 per cent of its portfolio in fixed interest with 1.80 per cent in the money market, while a Mixed Investment 40%-85% Shares member typically has 27 per cent in bonds and 4.20 per cent in cash, according to FE Analytics. However, it’s easy to find high-profile names that differ widely from these average allocations.

As could be guessed, Brookes is one. His flagship £1.5bn Schroder MM Diversity fund has just 10 per cent in fixed income and 29 per cent in alternatives such as Majedie Tortoise and Morgan Stanley Diversified Alpha Plus, with 31.8 per cent held in cash.

Performance of fund vs sector and index over 3yrs

  

Source: FE Analytics

The manager’s £311.2m Schroder MM Diversity Balanced fund, meanwhile, has only 1.2 per cent in bonds with 34.2 per cent in cash and 13.5 per cent in alternatives. His £216.4m Schroder MM Diversity Income fund has the most in fixed income at 14.6 per cent; there’s also 29.9 per cent in cash and 8.6 per cent in alternatives.

Of course, government bonds did have a strong 2014 despite most managers’ expectations at the start of the year. Brookes recently told FE Trustnet that this was the reason of his fourth quartile returns last year but said this is no reason to change his view that bonds are too expensive.


“A gilt that’s yielding 1.6 when core inflation is at 1.5 per cent makes no sense for a long-term investor. For us to be as wrong this year as we were last year, gilts have basically got to go to zero,” he said. “I’ve been saying ‘cash is king’ for about a year. It hasn’t quite worked yet but I’m fairly sure it will do.”

Schroder MM Diversity and Schroder MM Diversity Balanced are both members of the FE Research team’s Select 100 list of preferred funds.

The five FE Crown-rated Old Mutual Managed fund is another that has less in bonds than its average peer, with a weighting of just 19.40 per cent in its £180.2m portfolio. It also has 33.60 per cent in alternative investment strategies and 15.70 per cent in cash.

Performance of fund vs sector and index over 3yrs



Source: FE Analytics

The fund is headed by FE Alpha Manager Stewart Cowley, who is head of fixed income at Old Mutual Global Investors. Last year, Cowley described himself as “the bond manager who hates bonds”.

Old Mutual Managed, which invests in the asset management house’s own funds, has a generally cautious approach and has Cowley’s Old Mutual Global Strategic Bond fund as its largest holding. This fund has the ability to short bonds and the manager has positioned it in line with his view that the fixed income market is set for a fall.

It also has a large holding in the Old Mutual Global Equity Absolute Return fund, which is managed by the firm’s quantitative strategies team and offers diversification away from the mainstream asset classes of equities and bonds. 

Old Mutual Managed is another member of the FE Research Select 100, where it is highlighted for Cowley’s investment skills and its ability to bring diversification benefits to an investor’s portfolio.

Premier Multi-Asset Conservative Growth, managed by David Hambidge, Ian Rees, David Thornton and Simon Evan-Cook, has 18.5 per cent of its £94.5m portfolio in ‘specialist bonds’.

Performance of fund vs sector and index over 3yrs



Source: FE Analytics


Exposure is taken through the likes of the Kames Absolute Return Bond, TwentyFour Monument Bond and TwentyFour Dynamic Bond fund, which tend to have flexible and cautious approaches to the fixed income market.

It also has 31.8 per cent in alternatives, through a holding in the £387.3m Kames UK Equity Absolute Return fund as well as more specialised plays such as a GS 4YR Commodity Basket Call Certificate, the BNP Absolute Dispersion Collateralised fund and the JPM Global Merger Arbitrage fund.

Square Mile, which gives Premier Multi-Asset Conservative Growth an ‘A’ rating, said: “[The managers] are seeking the most appropriate and best opportunities to increase diversification within the portfolio, and in doing so, to improve the risk/return profile of each of their funds.”

Other multi-asset funds that have a below-average allocation to bonds and a decent weighting in alternatives include Old Mutual Cirilium Moderate, FP Russell Multi Asset Growth, FP Brown Shipley Income and CF Heartwood Balanced Multi Asset.

Next week, FE Trustnet will look through the risk-targeted sectors to see which funds are steering clear of the bond market and making greater use of alternative assets.

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