Investec Cautious Managed, JOHCM Global Opportunities and a selection of long/short strategies are all part of defensive fund positions held by IBOSS Asset Management’s Chris Metcalfe in his risk-rated fund-of-funds range. 
Earlier this week, the investment director outlined why he was pessimistic on the outlook for returns from markets and is holding record levels of cash and gold in his portfolios.
Both bond and equity markets having risen consistently over the past 10 years, with the Barclays Global Aggregates index up by 122.7 per cent and the MSCI World up by 140.23 per cent.
Performance of indices over 10yrs
Source: FE Analytics
As such, the fund manager is concerned by the potential returns on offer for investors due to high valuations and sees potential for disappointment from here on in.
Having upped his cash and gold weightings in the portfolios, Metcalfe tells FE Trustnet which funds he holds for core defensive positioning.
The most recent addition to the portfolios is Alastair Mundy’s £2.1bn Investec Cautious Managed fund.
“Obviously Alastair is a high profile manager – pretty much everybody know him – but I suppose the timing for some people might be interesting,” explained Metcalfe.
“From a performance point of view, I think he is pretty much bottom of the cautious managed sector over the last six months but he’s the deepest value manager and he’s holding a lot of out-of-favour stuff.”
Indeed, over the last six months the fund has returned 0.56 per cent, placing it in the bottom quartile of the IA Mixed Investment 20-60% Shares sector.
However, Mundy has a solid long-term track record, having beaten the sector average and CPI benchmark over the past decade, as the below chart shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“I suppose he reflects our overall view of the world which is fairly pessimistic. We brought Alastair in as extra insurance,” Metcalfe said. “Alastair is just another defensive brick in the wall.”
The fund is 27.2 per cent invested in UK equities, but has 13 per cent held in cash & short-dated government bonds and 9.4 per cent in physical gold & silver – reflecting the portfolio moves made by Metcalfe.
The fund has a yield of 0.49 per cent and a clean ongoing charges figure (OCF) of 0.85 per cent.
The second fund manager Metcalfe is backing is FE Alpha Manager Ben Leyland and his five crown-rated JOHCM Global Opportunities fund.
“The way we are putting most of our defensive positions, apart from gold and the elevated cash levels, is through the underlying fund managers themselves,” the IBOSS director said.
Much like the Investec Cautious Managed fund, JOHCM Global Opportunities has 19 per cent held in cash, reflecting Metcalfe’s pessimistic stance on markets.
“Ben Leyland is holding roughly 20 per cent in cash. So our explicit cash weightings are the highest they’ve ever been and then the implicit cash weightings of the underlying funds is probably the highest as well,” he said.
“At a lunch with Leyland a few weeks ago someone asked him why we are paying you to hold cash.
“Ben’s comment is [that] you’re not paying him to hold cash, you are buying his long-term track record and, as he pointed out, in 2009 he wasn’t holding any cash [when low valuations presented opportunities].
“That cash weighting basically reflects his view of the markets,” he added, noting that: “We think there will be a better entry point potentially than where we currently are.”
The fund currently holds 35 positions, with overweights in the industrials and technology sectors while underweights in the consumer discretionary and utilities sectors.
In its latest factsheet, Leyland said: “We do not know when the phrase ‘return-free risk’ was coined, but it certainly applies to the situation which equity investors face now.
“There are no stocks priced for a worst-case scenario. Far too many stocks offer more downside than upside on a fundamental basis.
“Even stocks in our portfolio have more downside than we are normally comfortable with. The best we can do is diversify the downside risks to avoid a contagion effect across the whole portfolio.”
The fund has been a top quartile performer over three and five years but has struggled more recently, bottom quartile over one year and six months. It has an OCF of 0.84 per cent.
Long/Short strategies
In the UK, Metcalfe holds two long/short strategies to help diversify his portfolios – Old Mutual UK Specialist Equity and Threadneedle UK Absolute Alpha.
“If markets are just going up in a straight line then these long/short strategies are going to hold you back but they give us overall a sub-1 beta which we have run for years,” Metcalfe said.
These two holdings are part of the fund’s UK equities allocation and are the “next part of our defensive strategy,” Metcalfe noted.
Since its launch in April last year, the Old Mutual UK Specialist Equity has outperformed both the IA Targeted Absolute Return sector and Euro Overnight Index Average benchmark, as the below shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The £468m fund, run by Tim Service is long technology, healthcare and financials while short on consumer services and consumer goods companies.
In its latest factsheet, the manager said: “The fund remains conservatively positioned, with few strong sector or thematic tilts.
“We continue to focus our efforts on good stock-picking on the long and short books. Net exposure to equity markets is essentially zero.”
Meanwhile, the £705m Threadneedle UK Absolute Alpha has outperformed the sector and benchmark over the last five years, returning 24.79 per cent.
The fund, run by Chris Kinder and Mark Westwood made a 4.04 per cent loss last year – the only year out of seven full calendar years it has registered a loss. The fund has an OCF of 0.87 per cent.
In its global equities allocation, Metcalfe also holds Old Mutual Global Equity Absolute Return fund run by Amadeo Alentorn, Ian Heslop and Mike Servent.
The £6.88bn fund is another long/short strategy that is currently net long technology and materials while net short energy and consumer staples.
It has returned 38.13 per cent over the last three years, more than double the IA Targeted Absolute Return sector average. The fund has an OCF of 0.85 per cent.
“That’s a 3 per cent holding out of our 30 per cent of international equity holdings,” Metcalfe said.
“So within the UK and global equities portion if you took an average we have probably got about 8-9 per cent in long/short.”
The last fund Metcalfe holds for its defensive nature is the £383m F&C UK Property run by Guy Glover and Julian Smith.
“It is the only UK bricks & mortar fund we are holding and is invested in almost 20 per cent in cash,” the IBOSS manager said.
The fund aims to provide income and capital growth through directly-owned investments in income producing properties.
It has 18.3 per cent in cash, though 4.5 per cent of this is cash that is to be allocated for investment, giving it a net cash position of 13.8 per cent.
It has been the best performer in the IA Property sector over the last year, returning 18.44 per cent, though has struggled over the last five years, returning 29.6 per cent.
The fund has a yield of 3.2 per cent and an OCF of 0.87 per cent.