Schroders head of multi-manager Marcus Brookes has become renowned for his more bearish view on the world over recent years due to his concern that most bond and equity markets have been widely distorted by central bank policies. 
This has led Brookes (pictured) to hold high levels of cash but very little in parts of the market such as US equities and fixed income in his Schroder MM range compared to many of his peers.
He has remained steadfast in his views and while this has hurt his relative performance in years such as 2014 and 2015, he has been able to shield his investors more effectively than most during 2016’s highly turbulent conditions.
In this article, the manager – who is in charge of £2.3bn worth of assets across his six funds of funds in the Investment Association universe – reveals five funds he is backing at the moment given his view on the direction of global markets.
Investec UK Special Situations
First off, Brookes says investors should be concentrating on equity funds with a value approach.
While this sort of strategy has struggled compared to funds that are biased towards growth or quality stocks, he thinks now is good time to take another look at the style and favours Alastair Mundy’s Investec UK Special Situations fund for his exposure.
“Broadly speaking, the value investment style has been out of favour and underperformed growth over the last five years. However, we are starting to see an environment in which we think value investing could make a comeback,” Brooke said.
Mundy, like many value managers, has had a difficult period over recent years. While his £1bn fund has comfortably outperformed the IA UK All Companies sector and the FTSE All Share since he took charge in 2002, it was bottom quartile in 2014 and 2015 which has led it to underperform over one and three years.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
Brookes added: “Recent performance on the fund has been slightly disappointing.”
“This is partly a result of the fund manager slowly buying into the commodities and materials sectors over the last couple of years, in which time they have struggled. But we think the potential in this portfolio could be about to be realised and it has already been adding value in what was a rough start to 2016 for markets.”
Currently, Mundy counts the likes of HSBC, BP, RBS, Lloyds and Tesco as top 10 holdings and has just 3.6 per cent in cash – which is low compared to the fund’s recent history.
While Brookes is favouring more unloved areas of the market at the moment, he also rates the four crown-rated Ardevora UK Income fund which is co-run by FE Alpha Managers Jeremy Lang and William Pattisson.
The £222m fund has performed well since its launch in January 2011 and is different to many other portfolios in the UK equity space, given the managers’ approach revolves around cognitive psychology and the belief that people in financial markets – be it company management teams, analysts or investors – are prone to making predictable mistakes, errors of judgement or biases.
The fact the fund tends to avoid mega-caps is also a draw, according to Brooke.
“Ardevora is a boutique asset manager that we like very much and this fund is run by Jeremy Lang, an investor who built a strong reputation at his former company Liontrust,” he said.
“This fund is rather different to the Investec offering, in that it is managed with a growth bias. However, unlike many growth-oriented funds, this one invests away from the dull, mega-cap stocks and favours mid-caps and large-caps.”
According to FE Analytics, Ardevora UK Income has been a top decile performer in the IA UK Equity Income sector since inception, returning 71.38 per cent compared to a 30.27 per cent return from the FTSE All Share.
It has also been top quartile in three of the last four calendar years. Ardevora UK Income – which yields 3.9 per cent – BAE Systems, British American Tobacco and Dairy Crest as top 10 holdings.
As mentioned earlier, Brookes has been very cautious on bonds for a long time now given his concern that the market has been distorted by central bank policies.
However, recognising he needs to maintain a diversified portfolio, he has been backing a bond manager who is also relatively bearish on the asset class – Bill Eigen and JPM Income Opportunity.
Though Eigen himself has historically ran a high cash weighting due to his concerns that bond yields didn’t reflect economic fundamentals, the turmoil in high yield bonds last year has led the manager to take big weightings to lower-rated credit.
“[Eigen] has been steadily increasing exposure to the high yield sector and it now accounts for almost 50 per cent of his portfolio, the maximum allowed by his mandate. He is an opportunistic manager and will sell down his exposure again when he thinks the opportunity has passed.”
Eigen had a strong long-term track record, but his highly cautious positioning over recent years (including a cash weighting which reached 60 per cent) has severely hurt is relative performance over recent years – as the graph below shows.
Performance of fund versus sectors since launch
Source: FE Analytics
His $4.9bn currently holds 57.6 per cent in BBB-rated or lower bonds, meaning JPM Income Opportunity yields close to 5 per cent. He still, however, holds 27 per cent in cash as he sees little value elsewhere in the bond market.
Though arguably the most hated asset class over recent years, gold mining funds have come roaring back this year thanks to a considerable spike in the price of gold.
One of those is Evy Hambro’s BlackRock Gold & General fund, which has made 47.44 per cent in 2015 already.
Brookes holds the portfolio for some time, fitting in with his view that investors may well lose faith with central banks’ abilities.
“We have a small holding in it and it has performed extremely well in recent months. Prior to that, performance was held back by the sharp decline in commodities prices. This led to a situation where valuations were suggesting that the mining industry was forever broken – this is something we thought unlikely.”
“Clearly the fundamentals remain challenging, but we think there is a value opportunity here. If we see a pick-up in inflation, then the gold price could rise, which would be very supportive for the performance of this fund.”
Despite its 50 per cent rise this year, BlackRock Gold & General is still down 20.95 per cent since Hambro took charge in April 2009 thanks to its double-digit losses in 2015, 2013, 2012 and 2011.
That being said, the five crown-rated fund is still comfortably ahead of its benchmark – the FTSE Gold Mining index – and the average IA gold fund, which has lost 42.62 per cent and 31.33 per cent, respectively, over the period.
Artemis Global Emerging Markets
Another area of the market which has been widely out of favour is emerging market equities, which have struggled due to tumbling commodity prices, China’s growth slowdown and a stronger US dollar.
Brookes has largely avoided the developing world within his portfolios due to the headwinds it has faced over the years, but with 2015 turning out to be such a tough year for funds in the space, he has been buying in over recent months.
His chosen fund for his exposure is Artemis Global Emerging Markets, despite its short-term track record.
“Emerging markets have underperformed developed markets over recent years, and it is an area we have largely been avoiding,” Brookes said.
“However, we recent started dipping our toe back in the water as we think the region is starting to become more attractive. One of the funds we like in this area is the Artemis offering, managed by Peter Saacke and Raheel Altaf, using the firm’s “SmartGARP” approach.”
“The fund is not too big and cumbersome, which gives it added flexibility to invest across the emerging markets spectrum, and it has a strong team behind it. We think it is a good option for playing the improvement in emerging market fundamentals.”
Performance of fund versus sector and index since launch
Source: FE Analytics
The £26m fund was only launched in April last year and over that time it has performed broadly in line with the IA Global Emerging Markets sector and its MSCI Emerging Markets benchmark with losses of 15.2 per cent.
The fund’s largest sector weightings include financials, technology and telecoms.
