Oil majors, government bonds and loan funds are some of the investments that the Old Mutual Generation range of funds are holding to create a balance between growth and defence that is appropriate for retired investors. 
In a recent article, we looked at the new investment philosophy behind the three funds in the range. This approach was implemented by Anthony Gillham and Paul Craig in October last year after they were handed control of the range to give it a complete overhaul.
Gillham and Craig’s approach revolves around balancing the prospect of capital growth with protection on the downside, which they believe is essential if investors are to see themselves through a comfortable retirement.
Part of the overhaul involved broadening the investments the range can make. It has previously been run on a fund-of-funds approach but now has greater powers to invest directly into stocks and bonds – an ability that Gillham says gives more control over the exact positioning of the portfolio and helps to bring down costs.
In the following article, we take a closer look at some of the positions Gillham and Craig have brought into the funds as part of their new strategy.
Going for capital growth
Gillham, investment director of Old Mutual Global Investors’ multi-asset unit, says the Generation funds now hold around 20 direct equities – a mixture of UK and European companies, in the main – but stresses that these are carefully selected to fit in with the aim of balancing growth and protection.
“Generally, what we are looking for are solid enterprises. The companies we've been buying have solid earnings profiles and a historic track record that hasn't disappointed,” he explained.
“We're not looking for the next big speculative idea for our portfolios, we're after stability and solidity - that will get us to our aim of balancing the portfolio. We don't want any surprises from the names we own.”
The manager adds, however, that this does not mean the fund is compelled to invest only in the safest names in the market. Indeed, he highlights BP and Royal Dutch Shell as two holdings that are out-of-favour but he believes do not have as poor a future as their current share prices are indicating.
Total return of stocks vs index during 2015
Source: FE Analytics
Gillham said: “They are two companies that are right at the eye of the storm at the moment, they really have struggled to an extent in terms of share price performance. But when we drill into the fundamentals of those two firms, we see some real resilience.”
“We certainly believe from an income perspective that they have delivered in the past and have a real scope to cut capital expenditure to maintain those robust characteristics. While the prima facie case is that these companies are in difficulties, our fundamental analysis of them would suggest otherwise.”
Protecting on the downside
The Old Mutual Generation range has also seen the addition of developed market government bonds to offer a degree of protection to the portfolios, even though the asset class was “unloved” for the bulk of 2015.
“I'm not going to sit here and tell you that developed market government bonds offer some kind of fantastic, compelling valuation case. But an interesting thing from a multi-asset perspective is we now have an environment with a real risk of deflation rearing its head around the world,” Gillham said.
He notes that the price of many key commodities such as copper and oil have been steadily falling and are now significantly down compared to where they were several years ago. This serves a warning sign for global growth and suggests it could prudent to prepare portfolios for the onset of deflation – even if this is not the most likely outcome.
“In that type of environment - where we get debt deflation, oil continues its downward spiral and there's something nasty brewing in China - even if you don't subscribe to that thesis you do need to balance the risks of in a multi-asset portfolio,” the manager said.
“Whilst I might be prepared to invest in solid fundamentals, even in companies that are in the eye of the storm, I do need to balance the risks. Owning some developed market government bonds in a portfolio like this and being prepared to increase that exposure when we get worried by the market environment is quite important.”
Achieving diversification
Although the Generation funds focus on balancing out growth and protection, it does own assets that fulfil other, related roles in the portfolio. One of these is offering a source of uncorrelated returns.
Gillham explained: “One area we've been focusing on is a part of the market we call 'alternative income'. These are assets that are generating attractive yields and are able to generate slow, steady, incremental returns. But they are also very uncorrelated to traditional equity and fixed income ideas that we have on in the portfolio.”
The 'alternative income' theme is a significant part of the Generation portfolios, with up to 15 per cent of the funds being invested into these ideas.
“We have number of examples of that, but an interesting area is the couple of loan funds we own,” the manager said. “These are loans that have been made to corporations but rank very senior in the capital structure of those organisations. At the same time, they pay quite an attractive yield.”
These holdings include Fair Oaks Income, which invests in US and European collaterised loan obligations. It invests in a diversified range of industry, with its largest allocations being towards the business equipment & services, electronics and healthcare sectors.
Other diversifying assets in the portfolio include infrastructure funds such as TG Rare Infrastructure, which focuses on global listed infrastructure and places the risk/return relationship at the core of its investment strategy.
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This communication provides information relating to a fund known as the Old Mutual Generation Fund (the “Fund”). This communication is issued by Old Mutual Global Investors (UK) Limited (trading name Old Mutual Global Investors), a member of the Old Mutual Group. Old Mutual Global Investors is registered in England and Wales under number 02949554 and its registered office is 2 Lambeth Hill London EC4P 4WR. Old Mutual Global Investors is authorised and regulated by the Financial Conduct Authority (“FCA”) with FCA register number 171847 and is owned by Old Mutual Plc, a public limited company limited by shares, incorporated in England and Wales under registered number 3591 559.
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OMGI 01/16/0399