Investors don’t need reminding that the last year or so has been tough for markets, given the significant global market volatility triggered by headwinds including China’s slowdown, a loss of confidence in central banks and plummeting commodity prices.
Performance of indices over 1yr
Source: FE Analytics
In an article published this afternoon, Murray International investment trust manager Bruce Stout argued that the market conditions we’ve endured since 2015 have never been seen before and remain unchartered territory for even the most experienced investor.
“To those familiar with history, nothing [in 2015] was familiar. Whilst at best disconcerting, and at worst downright dangerous, the most unsettling aspect is how ambivalent the world has become to the prevailing distorted financial landscape,” he said.
While some investors have seen the market dips as buying opportunities, others have been repositioning their portfolios to increase downside protection, minimise risk or even to hold larger amounts in cash until conditions begin to look more favourable.
As such, FE Trustnet asks a panel of investment professionals which funds they have been selling or reducing their exposure to over the last 12 months and why.
Standard Life Investments Global Absolute Return Strategies (GARS)
Dan Boardman-Weston (pictured below), head of portfolio management at BRI Wealth Management, says the firm sold out of Standard Life GARS at around this time last year.
The £26.5bn absolute return giant has been immensely popular with investors over the years for its ability to provide risk-adjusted returns regardless of the market cycle. However, the fund has come under fire recently for underperforming its LIBOR GBP 6 Months benchmark over the last year, providing a total loss of 5.26 per cent compared to the index’s total return of 0.73 per cent.
Performance of fund vs benchmark over 1yr
Source: FE Analytics
“We have been big backers and believers in GARS since they launched the fund in 2008 and it has generated excellent returns for investors. What we became slightly nervous on was the size of the strategy and the recent correlation and drawdown compared to certain asset classes,” Boardman-Weston explained. 
“The fund itself is £27bn but the strategy is a lot larger, whilst we have confidence that the strategy invests in liquid assets we prefer smaller funds that have the potential to be more nimble.”
The head of portfolio management adds that the fund has become increasingly correlated to a typical well-balanced portfolio – while this may not be a concern for others, Boardman-Weston is uncomfortable about how the fund is moving alongside other asset classes.
“The drawdown over the last year has been relatively elevated compared to peers and the sector (granted this is a short time frame),” he added.
“Finally, when GARS was launched it was one of very few funds that was targeting an absolute return. Since the inception of the strategy, the IA Targeted Absolute Return sector has grown in terms of FUM and number of funds. There are equally as viable competitors to GARS out there such as Aviva or Invesco, so investors now have a far larger range of funds to pick from that could be suitable for portfolios.”
Standard Life GARS has a clean ongoing charges figure (OCF) of 0.89 per cent and yields 1.57 per cent.
Darius McDermott, managing director at Chelsea Financial Services, has decided to trim the firm’s equity exposure by a couple of percentage points for value reasons. As such, he has decided to slightly reduce his exposure to the funds that have done particularly well for Chelsea, including FE Alpha Manager Terry Smith’s Fundsmith Equity.
“It’s been a year of volatility and a year of range trading, so we’ve trimmed our equities because we think we’re around the top of the range. The fact that we may or may not have trimmed a certain fund is not a reflection on whether we like it – we’re not making an asset allocation review in respect of style,” he explained.
“We’ve trimmed a little bit out of the funds that have done well for us. [Last week] we trimmed a little bit out of Fundsmith because it has done so well and we will probably buy it back again when markets are at a lower level.”
“Fundsmith has been a big winner out of the fact that quality companies have done so well. Those quality companies have repeated return on any capital employed and a good re-investment on franchises, they’ve all done very well. So we’ve just taken a little bit of profit out, just a teeny bit at the margins.”
The five crown-rated global growth fund holds a concentrated portfolio of 27 holdings, all of which are selected on the basis that they are high quality businesses that have advantages which are difficult to replicate, are resilient to change, have a high degree of certainty of growth from cash flow reinvestment and can sustain a high return on operating capital employed.
The fund’s largest holdings currently include the likes of Microsoft, US medical tech firm Stryker, Imperial Brands, Dr Pepper Snapple and tobacco firm Philip Morris International.
The manager’s stock-picking skills have stood the fund in good stead as it has more than tripled the performance of its average peer since its launch in 2010 and has more than doubled the total return of its MSCI World benchmark.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Fundsmith Equity has a clean OCF of 0.97 per cent and yields 1.06 per cent.
FE Alpha Manager David Coombs, who runs a number of portfolios for Rathbones including Rathbone Total Return and Rathbone Strategic Growth, is selling Kames Investment Grade Bond across his multi-asset portfolios as part of his move towards holding direct securities as well as collectives.
The four crown-rated fund is managed by Euan McNeil and Stephen Snowden, who will buy investment grade and government bonds globally while hedging at least 80 per cent of the fund back to sterling.
The fund is also able to hold up to 20 per cent in high yield bonds and can hold cash – its largest weighting is in BBB-rated bonds at 51.87 per cent, followed by A-rated at 21.25 per cent. It also has 9 per cent in BBB, 8.42 per cent in AA and 3.36 in A-rated bonds. Additionally, the fund has a 6.81 per cent weighting in contra market stocks, which negatively correlate with broader market indices, and holds 2.57 per cent in cash.
“The Kames’ fund invests predominantly sterling UK issuance; however, its unconstrained nature, by geography, is a very useful edge,” Coombs explained.
“The portfolio is always hedged back to sterling, so the managers are not taking large currency bets. The duo have posted strong returns over the past three and five years, which is one reason why we continue to hold it in other mandates.”
Over the last five years, the £1bn fund has provided a top-quartile total return of 35.57 per cent compared to its average peer in the IA Sterling Corporate Bond sector’s total return of 29.2 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It is also in the top quartile for its risk-adjusted return (as measured by its Sharpe ratio) over the same time frame, although it is in the bottom quartile for its annualised volatility and its downside risk (which estimates the fund’s potential loss) over five years.
The fund has a clean OCF of 0.79 per cent and yields 3.43 per cent.
