The third quarter of the year was a torrid one for markets, with stocks selling off on the back of a slowing Chinese economy and the devaluation of the yuan. 
One multi-manager team that has been defensively positioned for some time is Schroders’ Marcus Brookes and Robin McDonald, whose MM Diversity range has had a high cash weighting over recent years thanks to their distrust of inflated valuations caused by loose monetary policy.
However, Brookes and McDonald have faith in a select group of fund managers – in the below article, we take a closer look at three funds that have caught their interest recently.
Equities: Man GLG Japan Core Alpha
This £1.6bn fund is headed by Man GLG’s head of Japanese equities Stephen Harker, with Neil Edwards and Jeff Atherton the deputy managers. The team’s approach is to look for stocks that are trading on cheap valuations relative to their asset base.
Its performance over Harker’s time on the fund suggests this approach has been successful. FE Analytics shows that Man GLG Japan Core Alpha has posted a 66.45 per cent total return since 1 January 2006 – making it the second best performer in the IA Japan sector and representing significant outperformance of its Topix benchmark.
Performance of fund vs sector and index under Harker
Source: FE Analytics
McDonald said: “Japan remains our favoured equity region for now and the opportunities in both large caps and ‘value’ as an investment style look attractive.”
“The team’s investment process is consistently executed in a disciplined manner, allowing us to form good expectations as to how the team is likely to behave and evolve the portfolio as market conditions change.”
The fund’s largest holding is Canon (accounting for 5.5 per cent of assets) followed by Sumitomo Mitsui Financial (4.85 per cent), Mizuho Financial Group (4.43 per cent), Nippon Steel & Sumitomo Metal (4.35 per cent) and Honda Motor (4.33 per cent).
Recent portfolio activity has included adding to exposure in out-of-favour cyclical sectors such as iron & steel, glass & ceramics, machinery and banks, while trimming allocations to areas that have performed well of late, such as information & communications, electric power & gas and land transport.
Man GLG Japan Core Alpha has a clean ongoing charges figure (OCF) of 0.96 per cent.
Bonds: JPM Income Opportunity Plus
McDonald and Brookes have had a negative view on fixed income for some time, pointing out that the historically low yields on offer mean that the potential for future losses is high, and therefore favour this cautious fund for their exposure to the asset class.
“This is an absolute return fixed income fund with an emphasis on capital preservation,” McDonald said.
“Managed by Bill Eigen in Boston, this is a fund purposefully designed to provide a return uncorrelated with more traditional fixed income offerings – a desirable characteristic in the context of an asset class we consider to be richly valued.”
The offshore fund is the second largest holding in the managers’ flagship Schroder MM Diversity fund, with a 10.1 per cent allocation (only the cash weighting is higher). It is the only bond fund held by the portfolio.
Since launch in October 2011, the Luxembourg-domiciled JPM Income Opportunity Plus fund has outperformed its average peer with an 11.35 per cent total return, even though it has a cautious stance – it has around 30 per cent in cash.
Performance of fund vs sector since launch
Source: FE Analytics
The cautious positioning comes from Eigen’s view that the bond market is “broken” and that there will be “devastation” when interest rates start to rise. However, he has recently become more optimistic following the market volatility and has started to buy back into fixed income, with a focus on high yield.
“It’s one of the more exciting times for the strategy right now because we have finally been graced with some real volatility that we haven’t seen in years. One of the primary aims of the fund is when there is risk worth taking, we’ll take it,” Eigen said.
“When there isn’t risk worth taking – i.e. when volatility is very low and spreads are very tight – this fund will tend to be very defensive. It will hold a lot of cash, have more shorts than longs and not emphasise any areas of the market if everywhere is expensive.”
JPM Income Opportunity Plus has a 1.2 per cent OCF and charges a performance fee.
Alternatives: Majedie Tortoise
This global equity long-short fund, which aims to deliver positive returns whether markets are trending up or down, has been managed by Matt Smith since launch in 2007.
McDonald said: “Having a short book allows Matt to make money by expressing negative views on stocks as well as positive ones. Such strategies have an increasingly important role to play in portfolios as bull markets ultimately mature into bear markets. Matt has proven adept at making money in both.”
Since launch it has made an impressive total return of 124.58 per cent – significantly more than its average peer in both the onshore and offshore absolute return sectors.
Performance of fund vs sector since launch
Source: FE Analytics
It must be noted that this outperformance has come with more volatility than is usually seen with an absolute return fund. While the average member of onshore and offshore absolute return sectors has witnessed annualised volatility of less than 3 per cent, since inception Majedie Tortoise’s stands at just over 9 per cent.
However, the fund is also outperforming its average peer when it comes to risk-adjusted returns, as indicated by the Sharpe, Sortino and Treynor ratios, as well as alpha generation and the number of positive and negative months.
The fund is currently running 40 long positions and 40 shorts, with its largest long holdings being Tesco, Royal KPN, Telecom Italia, Orange and Vodafone. Its biggest shorts are towards the financial, consumer goods and consumer services sectors.
Majedie Tortoise has an ongoing charges figure of 1.59 per cent and also has a performance fee.
