The team at Hawksmoor has bought a new position in Aberdeen Asian Income but has been trimming exposure to the top-performing Standard Life Investments UK Equity Income Unconstrained fund and completely sold its longstanding allocation to Artemis Strategic Assets.
Hawksmoor is fast becoming one of the leading lights in the fund of funds space with its Vanbrugh and Distribution portfolios, which are both co-managed by Daniel Lockyer, Richard Scott and Ben Conway, among the best performers in their respective Investment Association peer groups over the medium term.
The five crown-rated PFS Hawksmoor Vanbrugh fund has the longest track record and it has been a top decile performer in the IA Mixed Investment 20%-60% Shares sector for both top quartile returns and risk-adjusted returns (as measured by its Sharpe ratio) since its launch in February 2009.
The PFS Hawksmoor Distribution fund, which is another five crown-rated portfolio, is also top decile for both metrics in the IA Mixed Investment 40%-85% Shares sector since its launch in April 2012.
Source: FE Analytics
The fund’s outperformance, according to the team, has been down to macro asset allocation calls and picking the right fund managers to play those themes.
Therefore, with 2016 fast approaching, Lockyer and Conway highlight three funds they have either bought, trimmed or sold completely heading into the New Year and give their explanations behind those decisions.
Bought – Aberdeen Asian Income Trust
Aberdeen’s stable of Asia Pacific funds and trusts have been among the dominate players in the industry over the longer term but have gone through a period of severe underperformance of late as manager Hugh Young’s quality-growth style has fallen out of favour.
These poor NAV returns along with a general distaste for Asian equities has caused the Aberdeen Asian Income Trust to move out to its widest ever discount of close to double-digits. Given the manager’s track record and the fact it has historically traded on a slight premium to NAV over three years, Conway says now is great buying opportunity.
“We are really pleased to get exposure to this as we were able to take advantage of a significant sell-off. We bought the trust at its widest ever discount of around 10 per cent and that is after the trust had fallen more than 40 per cent since May 2014.”
“It’s just the type of contrarian investment we like to take and we can afford to have a very, very long-term horizon with the trust and we are getting a very nice margin of safety both from the underlying value of the assets which have become cheaper and from its 10 per cent discount.”
According to FE Analytics, the trust – which yields 5.62 per cent and grown its dividend in every year since launch – has returned 121.36 per cent since it came to the market in December 2005 meaning it has outperformed its MSCI AC Asia Pacific ex Japan benchmark.
Performance of trust versus index since launch
Source: FE Analytics
However, the graph above shows just how much of its previous outperformance has been eaten away over recent years.
There are concerns, though, that Young’s quality-growth style will not continue to be a fruitful strategy over the next decade or so as, thanks to the changing dynamics within the region, many feel value-orientated funds will dominate. 
Nevertheless, Lockyer thinks this is too good an opportunity to ignore.
“Yes, the Aberdeen style under Hugh Young (pictured) has certainly underperformed over recent years but his track record spanning back decades has been fantastic.”
“We feel that one has to look through the current environment and look to the long term. That means backing trusted managers with good long-term track records. The fact it is trading on its widest ever discount and the portfolios has de-rated compared to the wider market gives us a safety cushion.”
Aberdeen Asian Income is geared at 9 per cent and has ongoing charges of 1.25 per cent.
Trimmed – Standard Life Investments UK Equity Income Unconstrained
On the other hand, the managers have been bringing down their exposure to the top-performing Standard Life Investments UK Equity Income Unconstrained fund, which is five crown-rated and run by Thomas Moore.
With Moore’s very benchmark-agnostic approach and preference for small and mid-cap companies, the now £1bn fund has been a top decile performer in the IA UK Equity Income sector since he took charge in January 2009 and has more than doubled the gains of the FTSE All Share.
On top of that, it has beaten the sector and index in five out of the last six calendar years and is outperforming so far in 2015.
Performance of fund versus sector and index under Moore
Source: FE Analytics
However, given its area of focus, Conway says now is a good time to bank some profits from the fund and reinvest those gains into more out-of-favour large-caps, which they are accessing via Fidelity Enhanced Income.
“We have trimmed the fund which has served us tremendously well and we still have a great deal of faith in that manager,” Conway said.
“Using that, we increased our exposure position in Fidelity Enhanced Income run by Michael Clark, essentially equalising those our positions in the two funds.”
“It really was a change at the margin just to reflect the fact that we have noted, as I’m sure everyone else has, that small and particularly mid-caps have been on a tremendous run and large-caps have been through a period of slight underperformance.”
“We feel it is sensible to equalise those positions and I would stress we still remain big supporters of Thomas Moore.”
Sold – Artemis Strategic Assets
One fund they have completely sold, however, is William Littlewood’s Artemis Strategic Assets and they are now simply using absolute return funds (such as Old Mutual Global Equity Absolute Return and Jupiter Absolute Return) to bring down overall portfolio volatility.
Littlewood has a faithful following of investors in his £893m fund but the manager is renowned for his longstanding bearish view on the bond market as a result of mass intervention by central bankers through quantitative easing.
Therefore, within his multi-asset fund he has been actively shorting the sovereign debt market. Of course, for much of the past six years this positioning has proved to be wrong and since he launched Artemis Strategic Assets in May 2009 it has underperformed its IA Flexible Investment sector.
Performance of fund versus sector since launch
Source: FE Analytics
Littlewood’s decent weighting to equities has helped the fund from further underperformance, though. Nevertheless, the manager continues to position for an inflation-driven crash in the bond market.
“Where does this all end? Currently most central bankers, politicians and investors view quantitative easing as a successful policy,” Littlewood said in his most recent note to investors.
“So we can expect more of it. One day I expect these policies to cause inflation and not just in asset prices. When that happens, if not before, markets will no longer welcome additional money printing. Governments will discover that money printing cannot build hospitals or pay pensions.”
“The longer economies are distorted by central bankers, the worse the day of reckoning will be.”
However, Conway doesn’t necessarily agree with this view at this point in time and feels now is a good time to sell.
“On Artemis Strategic Assets, it’s not that we have lost faith in Littlewood, who we continue to rate very highly,” he said.
“I think the point is that we were concerned that his quite large short positions that he has in the government bonds of nations like Japan and several of the European countries have started to stand counter to how we want our funds to be positioned.”
“We think those short positions he has in Japanese and European government bond markets will struggle to perform when the central banks of both of those economies clearly stating that their QE programmes will continue.”
“Therefore, we fail to see how those positions will meaningfully add to performance over the next six to 12 months. In fact, we think it will likely to be a drag.”
