Both managers have been very bullish over recent years with Potter telling FE Trustnet last year that he expected the FTSE to near its all-time in 2013. However, while they are still keeping a large proportion of their F&C MM Navigator range in risk assets, they have been increasing their weighting to absolute return funds to protect against a possible sell-off in both bonds and equities.
“It seems scarily consensual, but equity markets have come a long way now and the correlation between asset classes has increased,” Burdett said.
“We want a place where we can hide if, for instance, there is an escalation in tensions between Russia and the Ukraine or if tensions increase between China and Japan.”
“There are a number of unknowns in 2014 and we want to be in funds that offer us some form of protection.”
“We still think equities are the asset class of choice, but there is now far more downside risk and that’s why we think it’s sensible to be adding to our absolute return funds.”
“Correlations are higher but at the same the yields available have come down a lot.”
Investors in risk-assets have been well-rewarded since the period after the financial crash.
According to FE Analytics, the MSCI World index has returned 84.53 per cent over five years while the Barclays Global High Yield Corporate index has returned 89.9 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Burdett says, following that strong performance, investors should have a slightly more cautious outlook.
For instance, he has taken profits from a number of his equity and high yield funds and has rotated that capital into the CF Odey Absolute Return, Odey Odyssey, Majedie Tortoise and Morgan Stanley Diversified Alpha Plus funds.
All in all, Burdett says this means he and Potter are roughly neutral equities, as they feel the risks are now skewed more to the downside, having been very overweight the asset class and are now considerably underweight fixed income.
However, while Burdett says it is prudent to be adding to absolute return funds now anyway, having come through a period of underperformance; those portfolios’ underlying holdings are now looking cheap.
“Over the short term, these funds have fallen a lot as there has been a hell of a lot of rotation in the market,” Burdett said.
“Towards the end of March and into April, a lot of investors switched their portfolio out of high multiple growth stocks into large defensive stocks, many of which offer high exposure to the emerging markets.”
“It was really a valuation adjustment, as the market reacted after the initial crisis in the Ukraine. Investors probably felt that they had got away with it, so they reacted after the event and moved their portfolios into safer areas of the market.”
“It seems, however, that there has been quite a lot of indiscriminate selling.”
Burdett says that one of the funds that were hit particularly hard by the rotation was the £939m CF Odey Absolute Return fund, which is headed up by James Hanbury and Jamie Grimston.
Our data shows that, having returned more than 45 per cent in 2013, the fund has lost 3.35 per cent so far this year.
However, as the graph below shows, the majority of those losses have come over the last two months. Burdett says has used this period of weakness to add to his exposure.
Performance of fund vs sector and index in 2014
Source: FE Analytics
“We met with James Hanbury and Jaime Grimstone last week and they were saying that they were really enjoying this market rotation as they have been able to increase their exposure to stocks they really like and lower valuations,” Burdett explained.
One of the manager’s long positions, for instance, is Ocado, the online food retailer.
Shares in the stock have lost more than 20 per cent year to date, having fallen a hefty 45 per cent since February.
Burdett says that Hanbury and Grimston still see the company as one of their best alpha generating holdings as they expect the company to continually grow its earnings. To cover that trade, however, the managers are short the major UK supermarket chains.
CF Odey Absolute Return has an ongoing charges figure (OCF) of 1.45 per cent. Burdett and Potter have managed the F&C MM Navigator range since October 2007.
One of their best performing portfolios has been the £878m F&C MM Navigator Distribution fund.
According to FE Analytics, for instance, sits in the top quartile in the IMA Mixed Investment 20%-60% sector over five years with returns of 60.85 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It has also been top quartile over rolling one and three year periods and has only underperformed against the sector in one year since its launch, which was in 2011 when it lost 4 per cent.
F&C MM Navigator Distribution has a yield of 4.5 per cent and its OCF is 1.78 per cent.
