Sideways markets, volatility and a need for precise stock selection from managers are themes that are set to continue in 2016, according to Ryan Hughes (pictured). 
The multi-manager at Apollo says that he is therefore increasing the exposure of FP Apollo Multi Asset Balanced to absolute return funds and diversifying away from “normal” equities.
Another way he is generating asset class diversification is through holding 3 per cent of the portfolio in dollars, as he says there is less reason for the currency to devalue than the sterling or the euro.
“You can find different ways of making money, just by holding a bit of dollar for instance, without going into the ‘weird and wonderfuls’,” he said.
“Some of my peers are holding things like aircraft leasing, and it's niche. It's okay, but if you need liquidity, is it really going to work?”
“When you get new weird and wonderful investments, the issue you find is that they haven’t been tested in all market conditions, so of course these types of products are launched when they look great, and actually, when it gets a bit messy and you need liquidity, where is it? You don't know.”
“We're not going into that really alternative space, and we also don't think you need to. There are enough quality market-neutral funds, long/short equity funds, even global macro funds. So we’re looking at more traditional absolute return styles that veer you away from traditional equities and bonds and still generate decent returns.”
As such, the manager provides FE Trustnet with the names of three funds that he expects to both perform well and offer diversification in 2016:
The £4.7bn M&G Property fund is the largest holding in FP Apollo Multi Asset Balanced with a weighting of 9.33 per cent.
The fund mostly holds direct UK commercial property in office, warehouse and retail spaces, and currently has a 10.6 per cent cash weighting.
“I think it will be another solid year for property,” Hughes said. “I can see a few people getting worried about property valuations but, actually, I fully expect to get around 7 per cent from property this year, which might even make it the best-performing asset class this year.”
“We got 9 per cent from property last year, so yes it’s slowing but it’s not in a bubble and it’s not crashing.”
The manager says that, over the last two years, there has been a significant shift from capital growth to rental growth, and that many property managers have been able to increase the rent they’re charging by up to 20 per cent in recent months.
“West End offices in London look very expensive, but if you look outside of London it’s still the same story. There is still a lack of good quality industrial space out of London and there are more tenants than properties,” Hughes added.
M&G Property has outperformed its peer average in four out of six years since its launch, not including 2016.
As such, it is in the top quartile over one and three years as well as over three and six months. Despite significantly underperforming in 2010 and 2012, it has still managed second-quartile returns over five years, outperforming its IA property sector average by 438 basis points with a 35.91 per cent total return.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund, which has been managed by Fiona Rowley since its launch, has a clean ongoing charges figure (OCF) of 1.89 per cent and yields 3.26 per cent.
Hughes recently increased his exposure to the five crown-rated Henderson UK Absolute Return fund as a means of boosting the market neutrality of his portfolio.
“We're trying to think of as many ways as possible of making a bit of money rather than just relying on equities to go up a lot, because realistically that’s not going to work this year,” he said.
The £1bn fund has been headed up by the FE Alpha Manager duo Ben Wallace and Luke Newman since 2009 and 2010 respectively. Over the last five years, it has provided a total return of 37.21 per cent, which is one of the highest returns in its sector. However, investors must bear in mind that the fund behaves differently from many of its peers in that it aims to produce equity-like returns with minimal volatility.
As such, it means that it isn’t necessarily fair to pit the fund against the FTSE All Share either. While it has significantly underperformed the index since its launch in April 2009, it achieved less than a third of its annualised volatility.
Wallace and Newman’s fund came into its own during last year’s volatile market though, as the managers took advantage of its long/short mandate and achieved a return of 7.68 per cent compared to the FTSE All Share’s return of 0.98 per cent.
It also achieved less than a third of the index’s annualised volatility.
Performance of fund vs index in 2015
Source: FE Analytics
“It was a fantastic holding for us last year. In terms of wide dispersion, stock returns and volatility it’s great, and that’s where good managers should thrive,” Hughes said.
“The managers have been running the strategy under various guises for nearly 15 years so they’ve seen everything that markets have had to throw at them. We were happy to top that one up this year.”
Henderson UK Absolute Return has a clean OCF of 1.06 per cent.
Hughes says that, alongside market neutral investment vehicles, it is also important to generate growth from the strongest areas of the market to maximise returns.
One such example is Legg Mason IF Japan Equity, which has been headed up by Hideo Shiozumi since the fund’s launch in 1996.
The fund has demonstrated significant volatility over the years and has found itself in the bottom quartile for its annualised performance during four of the last 10 years.
Over the same timeframe, it is also in the bottom decile for its Sharpe ratio, which measures risk-adjusted returns, and for its maximum drawdown, which measures the most money and investor would have lost if they’d bought and sold at the worst possible times.
However, Hughes says that Shiozumi has extensive experience in Japanese equities, and that his fund tends to significantly outperform its peers in rising markets.
“In the equity space, I think over the course of this year Japan will do well and come back, and in which case our fund that will do the best this year is likely to be the one that did the best last year, and that’s Legg Mason Japan Equity,” Hughes said.
“It’s a Japanese concentrated small-cap fund. If we get a rally in equities it will outperform as it does time and time again, and it is high-beta, so I would expect that to do well in my equity bucket.”
Over the course of 2015, the four crown-rated fund almost tripled the performance of its peers in the IA Japan sector, providing a top-decile return of 49.35 per cent.
Performance of fund vs sector in 2015
Source: FE Analytics
However, its inability to cope during falling markets has taken its toll on the fund’s performance over the longer term, placing it in the bottom quartile over 10 years.
Legg Mason IF Japan Equity has a clean OCF of 1.12 per cent.
