Threadneedle European Select, Investec UK Special Situations and Stewart Investors Asia Pacific Leaders are just some of the regional equity funds the team at Dart Capital are using across their risk-adjusted portfolios, according to Alex George.
The associate research director says the firm adopts a blended approach when it comes to portfolio construction to minimise risk. As such, they don’t have favoured funds per say, but rather favoured fund combinations in a bid to achieve the smoothest returns possible.
In the below article, George discusses fund pairings across the five main equity regions that he has high conviction in and have been key constituents of Dart Capital’s portfolios for a significant period of time.
The UK: Threadneedle UK Equity Income and Investec UK Special Situations
Given that a majority of Dart Capital’s clients are based in the UK, the country accounts for an approximate 50 per cent weighting of the firm’s total equity allocation. 
One long term holding in this area is Threadneedle UK Equity Income, which has a 7.5 per cent weighting across Dart’s mid-risk portfolios.
Headed up by Richard Colwell (pictured) since 2010, the five crown-rated fund aims to outperform the FTSE All Share by 2 to 3 per cent per annum over rolling three-to-five year periods on a total return basis.
“We like the fact the manager blends dependable cash-flow compounders such as Reckitt Benckiser with more recovery names such as Morrisons and insurance companies, which have been broadly out of favour over recent years,” George said.
“That blend really does allow the fund to outperform. Given that it’s a large-cap UK equity income fund, it can outperform some of its peers during more positive periods for equity markets by not focusing solely on very defensive dividend-paying names.”
The associate research director says a complementary fund would be Alastair Mundy’s Investec UK Special Situations fund, which Dart Capital has been a long-term holder of across its mid- and high-risk strategies.
Performance of funds vs benchmark over 5yrs
Source: FE Analytics
The manager is renowned for his deep value approach and has a notably large weighting to domestic banks such as RBS, Lloyds and Barclays.
“Alastair Mundy’s fund does fall out of favour during periods when growth stocks are outperforming such as in 2015, which was a very difficult year for him,” George explained.
“We like this blend because there has been this big valuation divergence between growth and value, which has obviously closed quite significantly in the fourth quarter but prior to that, with value areas of the market tending to be in oil and gas or financials and being very cheap relative to more defensive sectors, having that blend is quite important for us. We like to make sure the portfolio isn’t too heavily tilted towards areas which have done well.”
Europe: Threadneedle European Select and JP Morgan Europe Dynamic ex UK
Within the equity portion of its mid-risk portfolios, Dart Capital currently has a 6 per cent weighting to Europe through a blend of the Threadneedle European Select and JP Morgan Europe Dynamic ex UK funds.
“Within Europe, there’s a big bifurcation between the valuations of growth stocks and value names. Companies with more global earnings are trading on fairly high multiples, particularly within the consumer staples space,” George explained.
“We added a holding in the JP Morgan fund [alongside Threadneedle European Select] because it is more domestically sensitive and more cyclical, which means it would then outperform should there be more of a value rotation in the market.”
“That’s worked very well for us, particularly over the last quarter of 2016 where investors became slightly more optimistic about economic growth with sectors like financials starting to outperform.”
Performance of funds vs sector and benchmarks over 5yrs
Source: FE Analytics
JP Morgan Europe Dynamic ex UK has five FE crowns and is managed by John Baker, Jonathan Ingram and Blake Crawford. It is unafraid to stray from its benchmark and, for instance, is significantly underweight financials and consumer goods relative to the FTSE All-World Developed Europe (ex UK index).
On its factsheet, it is described as a “higher risk/return strategy” well-suited for investors who are comfortable with “extra risks” inherent in the fund.
In contrast, Threadneedle European Select has a distinct focus on quality and invests in companies with strong growth characteristics, high barriers to entry and that have a competitive advantage.
Research firm Square Mile describes the fund – which is managed by Mark Nichols and FE Alpha Manager David Dudding - as not being “aggressively managed and “constructed with some consideration for its benchmark”.
Examples of the £3bn fund’s largest holdings include Unilever, RELX and L’Oreal.
The US: iShares S&P 500 UCITS ETF and Hermes US SMID Equity
Over in the US, Dart Capital has passive exposure to the S&P 500 through the iShares S&P 500 Ucits ETF fund, which has a five-crown passive rating and is $7.8bn in size. The fund accounts for between 8 and 9 per cent of the firm’s equity weighting across its mid-risk portfolios.
“It is a cliché but many US equity managers have struggled to deliver consistent levels of outperformance against the wider US market,” George said.
“Within the high-risk portfolio we do allocate separately to US mid- and small-cap. We’ve been long-term holders of the Hermes US Small and Mid-Cap Equity fund, which is run by Mark Sherlock.”
Performance of fund vs sector, benchmark and index since launch
Source: FE Analytics
“What we really value about that fund is it tends to avoid the more speculative end of the US small- and mid-cap US market, looking to those businesses that generate visible cash flows. They are also willing to go outside of the more highly touted small and mid-cap names – these businesses tend to be headquartered outside of New York and those businesses are usually somewhat overlooked.”
Hermes US SMID Equity resides in the North American Smaller Companies sector and is benchmarked against the Frank Russell 2500 index. Domiciled in Ireland, the £570m fund has 56 holdings, with the 10 largest accounting for 23.4 per cent of the overall portfolio.
Asia Pacific: Capital Group Japan Equity and Stewart Investors Asia Pacific Leaders
Dart Capital is particularly positive on Japan at the moment, given improved corporate governance in the region.
The firm is playing this through Capital Group Japan Equity, which is domiciled in Luxembourg and headed up by Seung Kwak, Andrew Johnsen and Akira Horiguchi.
“The team is largely on the ground in Japan, they have a high level of resource. It’s a blended strategy with a value manager, a growth manager and a small- and mid-cap manager, which together gives a more core exposure to the region. Their record has shown they’ve been able to deliver incremental alpha over and above that generated by the benchmark,” George explained.
The £182m fund has 94 holdings which are chosen on a bottom-up basis; the fund also has a low portfolio turnover at 26 per cent.
Alongside this, Capital Dart has been a very long-term holder of Stewart Investors Asia Pacific Leaders, which was managed by Angus Tulloch up until the end of last year. It is now headed up by co-manager David Gait – an FE Alpha Manager – and Sashi Reddy.
Performance of funds vs benchmarks over 5yrs
Source: FE Analytics
The £9.4bn fund invests in mid- and large-cap companies that are either based in or have significant operations in the region, most of which have a market cap of at least $1bn.
Currently, the five crown-rated fund has 44 holdings, almost a third of which are based in India. It also has significant weightings in Taiwan, Hong Kong and Australia and is very underweight China relative to its MSCI AC Asia Pacific ex Japan benchmark.
Emerging markets: Somerset Emerging Markets Dividend Growth
For exposure to emerging market equities, the team at Dart Capital uses Somerset Emerging Markets Dividend Growth, which has four FE crowns and is headed up by FE Alpha Manager Edward Lam.
“We added the Somerset Capital Emerging Market Dividend Growth fund to our list in October 2013,” George said.
“At that point in time, the fund wasn’t heavily supported within the discretionary space. We came across the fund through our screening which was based, not on performance, but on return characteristics such as beta and tracking error.”
“We were looking for a fund which had a high tracking error relative to the emerging market index because we feel the index is heavily weighted towards a lot of state-owned businesses which are either in financials or commodity-producing companies. Somerset had a good track record of capital preservation during down markets.”
Since its launch in 2010, the £1.3bn fund has returned 58.69 per cent compared to its sector average and benchmark’s respective returns of 25.49 and 29.72 per cent. It is also has the lowest maximum drawdown (which measures the most money lost if bought and sold at the worst times) and downside risk (which predicts susceptibility to lose money during falling markets) in the entire IA Global Emerging Markets sector over this time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“We are currently on the lookout for higher risk portfolios to allocate to at some point in time, maybe to a more value core fund, but we are cognisant of the fact emerging markets have had a strong run in 2016, particularly within more commodity-sensitive sectors,” George added.
“Therefore, at this point we are happy to hold fire and keep that one holding we have.”