Threadneedle UK Equity Income, JPM Emerging Markets Income and Schroder US Mid Cap are among some of the funds being used as ‘style diversifiers’ across portfolios at Architas, according to investment director Adrian Lowcock (pictured).
It is no secret that dovetailing portfolios is a constructive way to minimise portfolio volatility. Given the extreme sentiment swings over the course of 2016 as investors flocked from growth to value stocks, investors may be looking to adopt a blended approach when it comes to gaining exposure to different parts of the market.
In the below article, Lowcock gives three fund pairings across different equity regions which, when used together, could help to minimise drawdowns as investing styles dip in and out of fashion.
The UK: Threadneedle UK Equity Income versus Schroder UK Recovery
For more of a bias towards large-caps, the team at Architas uses Richard Colwell’s five crown-rated Threadneedle UK Equity Income fund. The £3.6bn fund has a relatively concentrated portfolio of 50 stocks, with its largest holdings including the likes of GlaxoSmithKline, AstraZeneca and Imperial Brands.
“Colwell focuses on providing a steady income and some capital growth. The fund is managed from a combination of macro and stock analysis,” Lowcock said.
“The fund looks to invest in a combination of companies from engine room compounders which have consistent high returns on capital employed and strong free cash flow generation to more contrarian value opportunities such where being a long-term investor means they can ride out the volatility in share prices.”
Over the past five years, the fund has returned 81.87 per cent compared to its sector average’s return of 64.5 per cent. It also has a top-quartile Sharpe ratio (which measures risk-adjusted returns), annualised volatility and downside risk (which predicts a fund’s susceptibility to lose money during falling markets) over the same time frame.
In terms of income, if an investor had placed £1,000 in this fund over five years, they would have received £252.93 in income.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Lowcock would pair the fund with Schroder Recovery, which has been headed up by Kevin Murphy and Nick Kirrage since 2006.
Lowcock says this would be a good combination because income is less of a priority for the duo when it comes to stock selection; they adopt more of a deep value approach.
“The Schroder Recovery fund also looks to invest in value companies, but the managers are looking at different types of companies,” he explained.
“They are looking for companies which have fallen on hard times and become unloved by the market but have the potential to recover. The fund is well positioned to benefit from the reflationary trade as it has exposure to banks and housebuilders.”
The £920m fund has 42 stocks and its three largest holdings are HSBC, Royal Bank of Scotland and Barclays.
While the fund struggled in 2015 when value stocks were particularly unloved, having made a loss of 12.74 per cent, it has still managed to outperform its average peer by 48.02 percentage points over five years with a total return of 110.15 per cent.
The fund is perhaps not for the faint-hearted, however, given it has a bottom-quartile maximum drawdown, annualised volatility and downside risk ratio over this time frame.
Emerging markets: JPM Emerging Markets Income versus RWC Global Emerging Markets
The £299m JPM Emerging Markets Income fund was launched in 2012 and aims to make use of the significant dividend pay-outs available across developing countries.
Currently yielding 4.6 per cent, the fund also aims to provide growth as well as income through stable companies with strong balance sheets.
“The fund tries to be less volatile than the market which is useful for long-term investors when considering volatile emerging markets,” Lowcock said.
“The managers run a concentrated portfolio of 50-80 stocks which offer dividend growth. The turnover is low to keep costs down, benefitting from compounding and ensuring they receive their dividends. Detailed stock analysis is critical to the process.”
Since its launch, the fund – managed by Omar Negyal, Jeffrey Roskell and FE Alpha Manager Amit Mehta – has returned 32.87 per cent, which is broadly in-line with its average peer and a slight underperformance of its MSCI Emerging Markets benchmark, as shown below. Its downside risk and annualised volatility is also similar to its sector average.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
If an investor had placed £1,000 into the fund at launch, they would have received £140.86 in income alone.
In contrast, the offshore RWC Global Emerging Markets fund has a distinct growth bias, opting for companies with sustainable cash-flows that are trading on attractive valuations.
“The RWC fund looks for growth at a reasonable price and top-down economic outlook is very important to investment decisions within the portfolio,” Lowcock said.
“The fund is index-agnostic with companies chosen on their own merits. The managers do tend to be opportunistic which tends to mean that the fund has little downside protection but should perform better in rising markets. Its growth focus complements the JPM Emerging Markets Income fund.”
Launched in January last year, the Luxembourg-domiciled Sicav has returned 70.44 per cent compared to its MSCI Emerging Markets benchmark’s return of 48.66 per cent and its average peer’s return of 39.57 per cent.
It boasts a top-quartile maximum drawdown, downside risk and Sharpe ratio relative to its peers, but it should be noted that the fund only has a track record during rising markets.
Examples of its largest holdings include Petroleo Brasileiro, Chinese travel provider Ctrip.com and Dubai-based real estate development firm Emaar Properties.
The US: Schroder US Mid Cap versus JPM US Equity Income
The five crown-rated Schroder US Mid Cap fund was launched by FE Alpha Manager Jenny Jones in 2005 and aims to provide growth through holding a combination of mis-priced value stocks, turnaround situations and steady growth stocks. They tend to have market caps of between $1bn and $7bn.
“This is a US small- and mid-cap fund managed out of the US by a very experienced and well-resourced investment team led by veteran investor Jenny Jones,” Lowcock said.
“The fund can be regarded as a defensive mid-cap, but should benefit from Trump’s reflationary policy. The team’s flexibility ensures the fund is diversified and that analysts look at stocks from a number of perspectives.”
Over five years, the £1.8bn fund has returned 142.94 per cent compared to its sector average and benchmark’s respective returns of 116.62 and 128.6 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
In terms of risk metrics, it is in the top quartile for its maximum drawdown, annualised volatility and downside risk over the same time frame.
Lowcock pairs this with the £3.7bn JPM US Equity Income fund, which is co-managed by Clare Hart and Jonathan Simon.
“The income focus of the JPM fund means this fund is more defensively positioned but is more likely to closely follow the market,” he explained.
“The fund focuses on companies with a durable franchise, not overly levered balance sheet, quality of earnings streams and a solid management team. Quality is their priority but they also want to ensure they’re paying a good price so the fund does a have a value tilt.”
Over five years, the fund has returned 127.26 per cent, underperforming its S&P 500 benchmark’s return of 134.58 per cent but outperforming its average peer’s return of 116.62 per cent.
While it is in the top quartile for its downside risk and annualised volatility, it has a third quartile maximum drawdown of 12.16 per cent following bouts of underperformance in 2012 and 2015.
If an investor had placed £1,000 into the fund over this time, they would have received £152.55 in income alone.