Taking profits from funds that have already done well and buying into unloved value areas could be the best way to navigate this years’ volatile market, according to Hawksmoor. 
Multi-managers Ben Conway and Richard Scott (pictured) told FE Trustnet last week that rather than buy into highly defensive assets, now is the time to focus on less mainstream areas of the market as it is defensives that are coming under pressure.
2016 has certainly been an interesting year to date, with China’s growth slowdown and weak commodity prices causing investors to turn pale within the first few weeks of the year.
Following positive macroeconomic data, a weakening dollar and increased signs of dovishness from the Federal Reserve, confidence has since increased and most major indices have now made a positive return year-to-date despite February’s sell-off.
Performance of indices in 2016
Source: FE Analytics
This means that conditions have certainly been choppy so far and as such, Conway and Scott – who co-run the Hawksmoor Vanbrugh and Distribution funds alongside Daniel Lockyer – have “reoriented” the funds’ portfolios over the last quarter.
“We decided to trim a very profitable holding in Dan Roberts’ excellent Fidelity Global Dividend fund (still a core holding) and sold completely out of Miton UK Value Opps following news of the managers’ imminent departure,” Conway said.
“We had been thinking of reducing equity exposure further ahead of this event anyway, but the news catalysed our decision. We also slightly reduced European equities.”
The proceeds from these sales went into several different areas including towards boosting the funds’ cash weightings. Within the Vanbrugh fund, this now stands at 7 per cent which 3 percentage points shy of the portfolio’s maximum cash tolerance.
The managers also added to ICG Enterprise investment trust, which is one of their longest-standing private equity holdings.
The £524m investment vehicle was launched in 1981 and was formerly called Graphite Enterprise – three of the trust’s top 10 holdings are Graphite Capital Partners funds. It currently has a NAV of £734.74m and is trading on a 26.3 per cent discount, which is 8.64 percentage points less than its three-year average.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
“We took advantage of the discount widening out to nearly 30 per cent,” Conway continued.
“NAV performance has been very solid and this level of discount gives us exactly the extent of safety margin we always look for.”
While the managers have been reducing their equity exposure generally, they have also been looking for dislocations amid market sell-offs. They believe that, while the sell-off at the start of the year was largely justified, there were a few areas of the market that shouldn’t have been hit so severely.
One such area is biotech, which has taken a nosedive over the last year despite the NASDAQ Biotech index significantly outperforming the NASDAQ OMX and MSCI AC World indices over the longer term.
Performance of indices over 1yr
Source: FE Analytics
To utilise this, Hawksmoor has introduced a small holding in Polar Capital Biotechnology, which was launched by David Pinniger in 2013 and is $54.1m (£36.8) in size.
The fund, which resides in the IA Specialist sector, aims to provide long-term capital growth through a concentrated portfolio of 45 holdings – its list of 10 largest weightings includes the likes of neurodegenerative specialist Biogen, therapeutics firm Gilead Sciences and cancer therapy manufacturer Celgene.
Since its launch, the fund has provided a total return of 71.2 per cent compared to its benchmark’s return of 45.85 per cent.
Performance of fund vs benchmark since launch
Source: FE Analytics
The second new holding that the Hawskmoor team has introduced to its portfolios is F&C Global Equity Market Neutral fund, which has been managed by Erik Rubingh since its launch in July last year.
“We are very fussy when it comes to absolute return funds and we think this fund has a good chance of delivering positive real returns in weak markets,” Conway said.
“Their process is extremely rigorous with heavy quantitative inputs – not dissimilar to Old Mutual Global Equity Absolute Return – another fund we own.”
The £216m fund aims to provide medium term growth and targets an annualised volatility of 10 per cent, compared to the MSCI AC World Index’s annualised volatility of 11.73 per cent over the last year.
The investment vehicle has outperformed the global index by more than eight times since launch with a total return of 14.7 per cent – it has achieved this with an annualised volatility of 9.57 per cent and a maximum drawdown (the most potential money lost if bought and sold at the worst possible times) which is half that of the index.
Performance of fund vs index since launch
Source: FE Analytics
“Within our Vanbrugh fund, our absolute return exposure is now at 14 per cent. Finally, within our Distribution fund, at the beginning of February we reduced European equities, introduced a new position in Ashmore Emerging Markets Short Duration, and increased our high yield exposure,” Conway said.
Ashmore Emerging Markets Short Duration is a SICAV that is registered in Luxembourg. The $347m (£236m) fund buys debt that is issued by sovereigns, corporates and quasi-sovereigns (government-backed private sector companies that provide a public service) – these are denominated in US dollars and will have a portfolio duration of between one and three years.
Since its launch in September 2014, the fund has made a total return of 8.43 per cent, outperforming its OR Fixed Interest Emerging Markets sector average by 9.78 percentage points.
Performance of fund vs sector since launch
Source: FE Analytics
While the fund has annualised volatility has been third quartile over the same time frame, it has a top-quartile risk-adjusted return (as measured by its Sharpe ratio) and a second-quartile maximum drawdown of 6.89 per cent.
“Despite the fact that we continue to de-risk the portfolios – something we have been doing since the beginning of 2014 – we have managed to keep pace with the peer group since mid-February despite having lower equity weightings than the peer group in both funds,” Conway pointed out.
“We’ve seen some good performance from some of the investments that much larger funds wouldn’t be able to build significant weightings in (many of our investment trusts like Phoenix Spree Deutschland, for example) and it’s great to see such a vindication of our process. When so many assets are expensive, being able to invest in as many as areas as possible is a real advantage.”
Since February’s sell-off, Hawksmoor Vanbrugh and Hawksmoor Distribution have delivered total returns of 6.37 and 7.87 per cent respectively, compared to their benchmark’s return of 5.07 per cent.
Both funds have provided top-quartile returns over the last year and above-average returns over the last three years.
Hawksmoor Vanbrugh has a clean ongoing charges figure (OCF) of 2 per cent and yields 1.66 per cent while Hawksmoor Distribution has a clean OCF of 1.88 per cent and is yielding 3.74 per cent.
