Increasing exposure to US equities then selling at their peak, introducing UK property and holding onto commodities to benefit from this year’s rally are some of the calls that have enabled Toby Nangle’s Threadneedle Dynamic Real Return fund to make healthy returns over its opening three years. 
The Threadneedle Dynamic Real Return fund, according to Nangle, is designed to appeal to “greedy, fearful investors” its long-only, unlevered[1], unconstrained and dynamically managed portfolio is run with this very much in mind.
“It’s important to define what we believe is the key risk that any investor in the Dynamic Real Return fund faces – and to us it is the risk of losing money. With this in mind we believe that this fund is the optimal investment for fearful greedy investors in that it has the ability to participate when times are good and protect their investment when dark clouds appear on the horizon,” he (pictured) said.
“We frame prospective investors’ expectations by saying that a good result in a year where equity markets rise 20 per cent would be the fund returning 12 per cent and in a year where equity markets were down 20 per cent a good result would be the fund losing 5 per cent. Aiming to achieve this balance of returns over the cycle leads us to our target of Consumer Price Index (CPI) +4 per cent per annum gross of fees, which is equivalent to the long-term return of equities.”
Between launch on 18 June 2013 and the end of June 2016, the £266.8m fund made a 15.38 per cent total return, net of fees. This is almost eight percentage points more than its average peer in the IA Targeted Absolute Return sector and much higher than the 2.34 per cent rise in UK CPI, which it aims to beat.
Indeed, as the below graph shows, the fund is just 59 basis points behind the FTSE All Share, although the continued strong run of government bonds means it is lagging the Barclays Sterling Gilts index.
Performance of fund vs sector and indices between launch and 30 June 2016
Source: FE Analytics. Total return, bid to bid, in sterling between 18 June 2013 and 30 June 2016. All returns net of fees. Past performance is not a guide to future performance.
On a calendar year basis, the fund has performed better than the FTSE All Share. When the index made a 1.18 per cent total return in 2014, Threadneedle Dynamic Real Return was 5.83 per cent; likewise it surpassed the market’s 0.98 per cent rise last year by making a 2.66 per cent total return.
These returns have come with annualised volatility[2] since launch of 4.50 per cent, which is lower than the volatility of both the FTSE All Share (at 10.09 per cent) and the Barclays Sterling Gilts index (at 7.07 per cent). Furthermore, the fund’s maximum drawdown[3] – which indicates the amount an investor would have lost if they bought and sold at the worst possible times – has been lower than either index at 4.00 per cent.
Nangle’s investment process makes use of the full resources of Columbia Threadneedle Investments, which has total assets under management of £323bn* in developed and emerging market equities, fixed income, asset allocation solutions and alternatives and employs more than 450 investment professionals across the globe.
The manager and his team use inputs from the asset management house’s regional and global teams to construct a “straw man view of the world”. They then carry out valuation work and take into account the views of the firm’s Sector and Thematic Group to make a judgement on how risk will be rewarded across asset classes.
“Having this approach means that we are able to alter the allocation of the Dynamic Real Return fund to suit the best environment; to either participate in risk assets or protect when risk will not be rewarded,” he said.
“This means over time we would expect to be in both fear and greed, but by having a strong, robust process that has stood the test of time means we can do this without the worry of being too ingrained in either camp.”
When building the portfolio, the investment team first determines the level of risk it feels comfortable taking in the prevailing market environment; it then looks to spend this risk budget by holding assets that it believes have strong risk-adjusted returns. This approach has a great deal of flexibility and allows the portfolio to move in line with the managers’ views.
“We move between ‘strongly favouring’ – so we will position the fund to participate in risks assets – to ‘strongly dislike’ – where we will invest in defensive assets to protect investors’ capital,” Nangle said.
“At the moment we are ‘dislike’ risk having been ‘neutral’ risk from February this year to June in the run up to the UK EU referendum. Prior to that we had ‘dislike’ risk due to our concerns on a combination of on valuations as well as a number of rising risks such as an oil glut pressurising companies' business models and governments' fiscal models, interest rate rises in the US likely to continue and continuation of China's slowing and rebalancing from investment-led towards a service-led economy.”
This focuses on where risk is best rewarded means that asset allocation has been the driver of more than 85 per cent of the fund’s total return since launch.
One of the specific calls that has led to the fund’s returns was increasing the allocation to US equities in 2014 – this moved from 6.5 per cent in May to 14.5 per cent in October, before being fully exited in May 2015. As the graph below shows, this was a period of strong gains for US equities (represented here by the S&P 500).
Performance of indices between 1 May 2014 and 30 Jun 2016
Source: FE Analytics. Total return, bid to bid, in sterling between 1 May 2014 and 31 June 2016. Past performance is not a guide to future performance.
Other drivers of returns since launch include an allocation to high yield – which was split evenly between European and US high yield, exited in order to take profits then later reintroduced with a focus on Europe – and bringing in UK property in 2015.
“That said we have not got everything right with our allocation to commodities hurting since inception,” Nangle added. “The work we undertook in conjunction with our commodity team led us to believe that commodities were bottoming sooner than actually happened. We have retained our allocation to commodities and this year it is benefiting the fund.”
Threadneedle Dynamic Real Return has a clean share class ongoing charges figure (OCF) of 0.93 per cent.**
*Source: Columbia Threadneedle Investments as at 31.03.2016.
**For more information on charges please refer to the Fund’s prospectus.
Important Information. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The fund characteristics described above are internal guidelines (rather than limits and controls). They do not form part of the fund’s objective and policy and are subject to change without notice in the future. Any opinions expressed by Columbia Threadneedle Investments are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Threadneedle Opportunity Investment Funds ICVC (“TOIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a Non-UCITS scheme. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. The above documents are available in English only and may be obtained free of charge on request from Columbia Threadneedle Investments at PO Box 10033, Chelmsford, Essex CM99 2AL. Threadneedle Investment Services Limited is registered in England and Wales, Registered No. 3701768, Cannon Place, 78 Cannon Street, London, EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
[1] Leverage is the use of financial instruments or borrowed capital to increase the potential return of an investment
[2] Volatility is the extent to which the value of an investment fluctuates over time. Higher volatility is generally considered to equate to higher risk.
[3] Maximum drawdown represents the worst possible return over a period — for example, buying at the maximum price over the period and selling at the worst price.