The equity exposure of the top-performing MI Hawksmoor Vanbrugh has never been lower as, 10 “extraordinary” years after launch, the decade-long bull market means there is “a lack of really exciting investment opportunities”.
The £143.7m fund launched on 18 February 2009 and since then it has generated a total return of 160.92 per cent, which is the second highest in the IA Mixed Investment 20-60% Shares sector. It’s also in the peer group’s top quartile over three and five years.
MI Hawksmoor Vanbrugh’s process revolves around finding a margin of safety, which means that its managers – Daniel Lockyer and Ben Conway – want exposure in their fund-of-funds portfolio to assets that are trading at a discount.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“People think we got lucky launching in 2009, pretty much in the trough of the bear market, as all we had to do was be risk-on and put loads of equities in there to ride the bull market. The truth of what we actually did couldn’t be more different,” Conway explained.
“In the early days we only had about 40 per cent in equities and more than 50 per cent was in fixed interest. Our process looks for a margin of safety and in 2009 you didn’t have to take loads of risk and go to the lowest part of the capital structure, i.e. equities, as you could find cheap assets further up the capital structure.
“So we launched with quite a few strategic bond funds in the portfolio, managed by talented fixed income investors who identified very cheap, deeply discounted corporate credit. The returns we saw from those sorts of assets were absolutely phenomenal.”
Given that the fund’s process is focused on valuations and margins of safety, Lockyer and Conway – who both hold FE Alpha Manager status – concede that the conditions today look very different to those facing it in the early days.
“I think it's true to say the portfolio has probably never been as cautiously positioned as it is now, but it would be odd if it was any different because we are effectively 10 years through a bull market,” Conway explained. “It would be odd if the portfolio didn’t have high weightings in more defensive assets.”
MI Hawksmoor Vanbrugh currently has 26.6 per cent of its portfolio in listed equities, which is its lowest weighting to the asset class since launch. Other more defensive allocations include 4.1 per cent in sovereign bonds, 12.1 per cent in absolute return funds and 7.7 per cent in cash.
While the equities’ weighting has been drifting downwards, the fund’s exposure to protective assets such as gold equities, managed futures funds and UK property has been increased in recent months in expectation that markets will at some point enter bear territory.
MI Hawksmoor Vanbrugh’s portfolio breakdown
Source: Hawksmoor Investment Management
The portfolio’s gold equity allocation is achieved through holdings in Merian Gold & Silver and LF Ruffer Gold. The Hawksmoor managers are “very, very confident” that gold equities will perform “extremely well” during the next bear market and will be an important element of capital preservation.
“Managed futures funds are essentially trend-following strategies,” Conway added. “They should follow a trend and when a bear market trends sets in managed futures funds are one of the few funds you can own in a long-only format that can that protect you. We'd rather own a fund like that than buy puts, which can be an expensive form of insurance.”
Exposure to this is being taken through Natixis ASG Managed Futures Strategy and Garraway Financial Trends.
When it comes to property, MI Hawksmoor Vanbrugh likes specialist areas where it can see interesting investment opportunities and attractive discounts. It owns Civitas Social Housing and AEW UK Reit.
“Even though I think a bear market is inevitable and the bear market will be potentially quite deep and severe, it's nice to know that we've got some assets that should do really well in that environment and help offset some of the falling prices elsewhere in the portfolio,” he added.
The team behind MI Hawksmoor Vanbrugh would not describe itself as having a bullish mindset at the moment, in light of the above points. But nor is it bearish, with Conway noting that there are still some “genuinely cheap assets” – especially in the closed-ended space, such as Tufton Oceanic Assets – giving confidence.
Instead, the manager said the team is heading into the next 10 years of the fund with a realistic mindset.
“We have to be realistic and recognise that valuations generally today are extreme and the reason why they're extreme is because of the unusual monetary policies that we’ve seen as a result of the global financial crisis,” Conway concluded.
“I would be flabbergasted if the next 10 years were to produce that sort of return because we have just been through I think a truly extraordinary period of time. It is only right that all fund managers communicate that to their clients and contextualise the last 10 years with them with regard to what's likely over the next 10 years.
“But all I can promise is we'll do our very best. We think we've got a process that's repeatable, that's consistent and that puts us in the best position to do a good job for investors. We've got the right objective at the forefront of our minds, which is positive returns over a three- to five-year period. That's what we have to do because, as a fund manager, if you're not delivering positive real returns there is absolutely no point in you existing.”