It’s common knowledge that portfolios should be as diversified as possible in terms of region, asset and sector allocation. However, the issue investors are faced with is which managers and which funds they should opt for to best represent each area of the market.
Adrian Lowcock (pictured), head of investing at AXA Wealth, says that portfolio diversity is one way of reducing investment risk and adds that good portfolio construction can reduce volatility while simultaneously maximising returns.
As such, he says that choosing managers that fit well together as well as maintain strong funds individually is one of the keys to success when it comes to portfolio construction.
In light of this year’s UEFA European Championships, he has constructed a team of managers that he believes are up to the task of fulfilling investors’ desire for risk management, high returns and low levels of volatility.
“The comparison to a football team highlights the importance of investing defensively and preserving capital whilst also ensuring there is some room for capital growth where possible,” the head of investing explained.
Goalkeeper
“The goalie needs a safe pair of hands to get you out of trouble when all else has failed,” Lowcock said.
“It makes sense that this position is reserved for a quality bond fund manager who provides security.”
He has selected Ian Spreadbury’s Fidelity MoneyBuilder Income fund for this position, which is £3.5bn in size and has been headed up by the FE Alpha Manager for more than 20 years.
The fund comfortably resides in the second quartile over one, three, five and 10 years and has an FE Risk Score of 25, which estimates that the fund is only a quarter as risky as tracking the FTSE 100 index.
Over Spreadbury’s tenure, it has also achieved a top-quartile annualised volatility, maximum drawdown (which measures the most potential money lost if bought and sold at the worst times) and Sharpe ratio (which measures risk-adjusted returns).
Performance of fund vs sector and benchmark under Spreadbury
Source: FE Analytics
“More in the mould of Joe Hart than David James, this manager will provide some security and structure to your portfolio. Don’t expect any heroics or flashy play,” Lowcock added.
Defenders
In terms of the managers that best protect capital during down markets, the head of investing has opted for four managers that run vastly different mandates.
First up is Scott Thiel and his £75m Blackrock Fixed Income Global Opportunities fund, which has also been co-managed by Bob Miller and Rick Rieder since last year.
The managers aim to provide a positive total return over the medium-to-long term through the fund, which resides in the IA Sterling Strategic Bond sector.
“Given current market conditions we feel a flexible conservative player able to deliver even in difficult conditions is essential to portfolios,” Lowcock explained.
The next defensive fund pick is the behemoth Standard Life GARS fund, which is headed up by a team led by investment director Guy Stern.
The £26bn fund is renowned for adopting multiple long/short strategies at any one time in an attempt to deliver a positive total return regardless of market conditions over rolling three-year periods.
Since its launch in 2008, it has more than quadrupled the performance of its LIBOR GBP 6 Months benchmark.
The third defensive manager Lowcock has opted for is Matt Jarvis, who runs the £2.5bn Legal and General UK Property fund. The direct property investment vehicle currently has 106 holdings and a 21 per cent cash buffer.
“Commercial property is a good diversifier from traditional equity investments and has historically generated a decent income whilst providing some downside protection and defensive characteristics,” he said.
“However Jarvis has the ability to use derivatives and property shares giving him greater flexibility and the potential ability to drive growth.”
Completing the back for is Iain Stewart and his Newton Real Return fund. It has been headed up by the manager since 2004 and, over this time frame, the manager has provided a total return of 149.64 per cent, which is 58.05 percentage points more than his manager peer group composite.
Performance of Stewart vs composite since fund launch
Source: FE Analytics
The £9.3bn fund has also achieved almost half of the annualised volatility and a third of the maximum drawdown of the MSCI AC World index since its launch.
Midfielders
When it comes to managers who can deliver growth, diversification and stability while taking on slightly more risk than the ‘defenders’, Lowcock has opted for four equity fund managers to pack the football.
Schroder Global Recovery’s Kevin Murphy is one choice, who Lowcock likes for his bottom-up approach to stock picking and his focus on companies that are undergoing corporate recovery.
“Murphy aims to deliver growth by investing in companies that have suffered severe short term setbacks but he will not take unnecessary risks,” he explained.
The £13.4m fund was launched last year and has a fairly concentrated portfolio of 46 holdings. Murphy and Kirrage are household names in the fund management industry though, having managed portfolios for Schroders since 2006.
Lowcock’s second choice is Richard Colwell and his four crown-rated Threadneedle UK Equity Income fund, which he says is fairly defensive while aiming to deliver a strong long-term performance.
Since its launch in September 2010, it has provided a total return of 93.04 per cent, outperforming its sector average and FTSE All Share benchmark by 24.56 and 42.75 percentage points respectively.
It has an FE Risk Score of 97 and yields 4 per cent.
The next choice is JPM Natural Resources, which is headed up by Neil Gregson.
“Inclusion of a commodities fund into the squad may raise an eyebrow as this sector has been volatile and performance has been poor in recent years. However diversification is essential in a portfolio,” Lowcock pointed out.
The head of investing adds that, because of the fund’s bias towards small and mid-sized companies, its performance is likely to be volatile and outperformance will appear in short bursts.
The final choice for a mid-fielder position is FE Alpha Paul Spencer, who runs the five crown-rated Franklin UK Smaller Companies fund alongside Richard Bullas and deputy manager Mark Hall.
Lowcock says that smaller companies provide growth that is not achievable in larger companies and adds that Spencer is a pragmatic manager with a strong long-term track record.
The fund, which is 273m in size, holds a concentrated portfolio of 46 stocks which are chosen through bottom-up stock selection.
Strikers
In terms of the higher-octane funds set to really bolster returns, Lowcock has chosen Angus Tulloch’s Asia Pacific Leaders fund and Ross Teverson’s Jupiter Global Emerging Markets fund to lead the line.
The former has five FE crowns and is £8.4bn in size. It invests in a combination of large and mid-caps within the Asia Pacific ex Japan region and currently has 46 holdings.
Since its launch in 2003, it has provided a total return of 438.49 per cent compared to its sector average’s return of 217.92 per cent.
It must be noted though that, as of June 1, the fund now has fellow FE Alpha David Gait at its helm, although the manager is likely to retain a similar investment process to Tulloch according to most investment professionals.
Teverson’s Jupiter Global Emerging Markets fund has four FE crowns and was launched in 2010. It has an FE Risk Score of 125 and a bottom-quartile annualised volatility and maximum drawdown since the manager took over the fund 18 months ago.
However, it has outperformed its sector and benchmark over this time frame, having made a loss of 2.68 per cent compared to its peer group composite’s return of 5.68 per cent.
Performance of fund vs sector and benchmark under Teverton
Source: FE Analytics
“[Teverson] lives and breathes an unconstrained approach to investing and runs a high conviction portfolio, each holding has to justify its place in the portfolio,” Lowcock said.
