Hepworth, who runs a suite of risk-rated discretionary portfolios for GAM, says he has sold out of gilts and slashed his weighting to investment-grade corporates to a significantly underweight position. "Even a year ago fixed interest was over-inflated and had I been running the fund then I would have been underweight," he said.
"We launched underweight gilts and then they hit that critical yield level in March; we needed to look for other investments with bond-like returns and we completely sold out."
Data from FE Analytics shows that gilts started to rise in price in mid-March following a period of steady declines.
Performance of index over 1yr
Source: FE Analytics
Hepworth admits he was surprised by the spike that followed his sale of the investments, but says that he stands by his reasoning.
"The gilt market sold off in June last year, losing 4 percentage points, following strong returns."
"They have had a bit of a charge since then thanks to a re-emergence of the Europe crisis and the downgrade – which is an illogical reaction."
He says that having the ability to select alternative assets is a huge bonus for a fund of funds manager.
"Traditionally a mixed-asset manager has to choose between equities and bonds, and absolute return was the other opportunity set."
He says the following alternative assets are piquing his interest at the moment.
Mortgage-backed securities
"We moved into funds like DoubleLine, run out of LA by Jeff Gundlach, a mortgage-backed specialist," Hepworth continued.
"The mortgage crisis in the US has stabilised since 2008/2009 and this isn’t an asset class that is easily accessible to retail markets in the UK."
Mortgage-backed assets were largely deemed responsible for the failures in the US banking system that sparked the ongoing financial and economic crisis around the world.
This made them a hard-sell for some years, but Hepworth is not the only manager to say that they now look attractive.
FE Alpha Manager David Coombs, head of multi-manager at Rathbones, recently told FE Trustnet he was getting back into the asset class, while Miton’s Simon Callow said the same.
Hepworth says that he chose the DoubleLine fund after being impressed by the manager’s performance on a hedge fund using the same asset class.
Although the fund is accessible through Hepworth’s GAM MPS Balanced fund, it cannot be accessed directly by retail investors.
However, there is an alternative: the PFS Asset Backed Income fund, run by TwentyFour Asset Management.
This fund focuses on European securities backed by mortgages and other assets and is the fund of choice for both Coombs and Callow.
Launched only in January, it is available with an initial investment of £1,000 and has ongoing charges of 0.86 per cent.
Absolute return
Hepworth admits that absolute return has not had a good last few years, but he says that investors should look at the individual funds to see how they have fared.
He sees no reason to look past the biggest name in the sector, the gigantic Standard Life GARS fund – now at £16bn and counting.
"GARS has had tremendous performance with its macro style," he said. "Capacity could be a concern if it gets to the £40bn that Standard Life has said is the fund’s limit, although at the moment it isn’t a worry."
The fund has managed to make money in each calendar year since launch, according to data from FE Analytics, for a total gain of 41.02 per cent.
Calendar-year performance of fund since launch
| Name | 2013 returns (%) |
2012 returns (%) | 2011 returns (%) | 2010 returns (%) | 2009 returns (%) |
|---|---|---|---|---|---|
| Stan Life Inv - Global Absolute Return Strategies | 4.77 | 6.91 | 2.14 | 9.82 | 18.47 |
| IMA Absolute Return | 2.76 | 3.41 | -1.26 | 4.32 | 8.61 |
| LIBOR GBP 6m | 0.2 | 1.1 | 1.16 | 0.97 | 1.43 |
Source: FE Analytics
Available with a minimum initial investment of £500, it has ongoing charges of 1.59 per cent.
Emerging markets debt
"We are overweight emerging market debt, including local currency emerging market debt," Hepworth said.
"The majority of the overweight is in Latin America, quite considerably overweight, in fact, which is where the best opportunities are."
"In Asia and the Far East there isn’t so much value. There’s been a lot of currency manipulation going on there, in Korea and Japan in particular."
Hepworth says that the unpredictable effects of currency risk have to be taken into consideration, but the overall debt dynamics are so much stronger in the emerging markets that he would rather hold their debt than that of western governments.
One of the funds Hepworth uses is the GAM Star Emerging Markets Total Return fund, an offshore vehicle launched in March 2010.
He says that the benefits of using an in-house team include being able to charge investors less, as GAM only takes one set of fees when holding its own funds in a model portfolio.
Data from FE Analytics shows that the fund has made 44.77 per cent in sterling terms since launch in November 2009, having seen a fall in value in recent weeks.
Performance of fund since launch
Source: FE Analytics
The fund is available with a minimum initial investment of £6,000 and has ongoing charges of 1.8 per cent.
A more mainstream alternative is the onshore Threadneedle Emerging Markets Bond fund, available with a minimum initial investment of £2,000 and with ongoing charges of 1.69 per cent.
Property
Hepworth says that he has been looking at property but has been put off by the poor yields on offer and the low possibility of capital growth.
He points out that it is difficult to invest directly in property through a UCITS fund as there are few PAIFs available.
However, there is one that FE Trustnet has written about before that should be on investors’ radars.
The Freehold Income Trust produces remarkably stable returns by investing in freeholds, as was outlined in a previous article.
Data from FE Analytics shows that the fund has the best risk/return profile of any in the IMA universe over five and 10 years.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund was converted to a PAIF earlier this month, meaning it is no longer counted as a UCIS.
It is available for a minimum investment of £5,000 and has ongoing charges of 1.9 per cent.