Hawksmoor Investment Management has added little-known managed futures strategies to offer protection from volatility in their latest rebalancing of their MI Hawksmoor Vanbrugh and MI Hawksmoor Distribution funds’ portfolios.
The new positions are part of a rebalancing of Vanbrugh’s portfolio towards more alternative investment strategies.
The firm has added exposure to five FE Crown-rated Garraway Financial Trends and Natixis ASG Managed Futures.
Changes in Vanbrugh’s portfolios have followed profit-taking in strategies including the Baring Global Resources, Baring European High Yield Bond funds and Artemis European Opportunities.
FE Alpha Manager Richard Scott said he believed valuations had reached unsustainable highs prompting the move from the traditional bond and stock portfolio to one including commodity trading adviser (CTA) funds, which he felt will help them deliver good performance in the future.
As shown in the chart below, CTA/managed futures strategies - as represented by the HFRX Macro/CTA index - can exhibit lower volatility than the market, although this can result in lower returns.
Rolling 3yr volatility over 10yrs in USD
Source: FE Analytics
“Allocation to managed futures will improve absolute return and volatility numbers while reducing drawdowns, so this gives us comfort,” he said.
Chief investment officer Daniel Lockyer said the firm was looking to “increase the [managed futures] allocation from the current one per cent over the next few months”.
Lockyer said one major reason to include managed futures was the negative correlation between these strategies and other asset classes such as stocks or bonds.
While rising inflation concerns could lead to underperformance of stocks and bonds, some managed future programmes might outperform under the same market conditions, he said.
Lockyer added: “The correlation of gilts versus equities has been falling deeper and deeper into negative territory until the last few years, where it has started to rise.
“In this quantitative easing era where aggressively loose monetary policy has helped equity markets grind higher, we think that it’s natural that these correlations have increased. But what if the equity sell-off that may come next is triggered by a fall in bond prices and a rise in bond yields?
“That diversification is therefore not going to work in the future so we are always thinking what to do to improve the portfolio,” he said.
“What makes it harder for us now is that we are fully invested, we don’t do market timing, don’t hold lots of cash, and don’t use derivatives or options of futures.”
But these alternative investment strategies also have their downsides, which Scott and Lockyer also noted.
“The disadvantage [of managed futures] is in the timing,” said Lockyer (pictured). “Take today’s market, for example. There is a clear trend in US equities and most managed future funds are long US equities, but, if the S&P 500 fell 10 per cent tomorrow, the allocation of these managed future funds will also fall significantly. 
“We therefore recognise that an allocation to managed future funds will detract in the first wave of an initial sell-off but, once the falling trend has been identified, then they work best in a prolonged bear market.”
While the strategies are little-known in the UK retail industry they are common in the US and have been increasingly utilised by discretionary fund managers more recently such as Thomas Miller Investment and Seven Investment Management.
The managers also continue to be active in the investment trust space, where they have added new alternatives positions in the shape of Taliesin Property and listed hedge fund BH Global.
“We sold our holding in TR Property investment trust, which has served us exceptionally well,” they said. “Not only have the assets done very well but the discount narrowed to a level where we thought the downside risks in the market environment had deteriorated.”
Following what they described as “another solid quarter for the funds”, the pair highlighted the importance of achieving effective diversification in what they recognised is “an unusual set of market conditions”.
As a result, they decided to make some tweaks to the Vanbrugh’s portfolio, slightly reducing areas where they felt prices had run ahead of what they felt were sustainable valuations.
“We did a shift from European high yield bond into Asian investment-grade credit where we feel was going to be picking up returns for actually something that is lower risk,” Scott added.
In the Distribution fund they said they are reducing some exposure to European assets, more specifically to high yield bonds, where they did the same switch to Asian investment-grade credit.
“Another feature was slightly tilting the equity exposure within the Distribution fund’s portfolio towards a bit more of a value tilt, building on exposure to Schroder Global Equity Income fund and introducing a holding in Old Mutual Global Equity Income fund, with a more growthy-orientated equity exposure,” Scott said.
The $191.3m Old Mutual Global Equity Income fund is managed by Ian Heslop, Amadeo Alentorn and Mike Servent.
The fund targets a total return from a combination of income and capital growth through a diversified portfolio of global equities and, as such, has more than 400 individual holdings. Since launch in July 2015, the managers have delivered a total return of 63.20 per cent, compared with a 49.20 per cent return for the MSCI World index benchmark and a 36.04 per cent gain for the average IA Global Equity Income sector fund.
The £128.1m MI Hawksmoor Vanbrugh fund been managed by Scott since launch in 2009, who was joined later that year by Lockyer. Co-manager Ben Conway joined the team in 2014.
The five FE Crown-rated fund is designed to have a broad appeal and aims is to provide capital growth and income.
Its largest individual holding is Jupiter Absolute return followed by Royal London Short Duration Global High Yield.
Since launch the fund has delivered a return of 158.51 per cent compared with a 126.55 per cent gain for the benchmark FTSE UK Private Investor Income index and a gain of 89.37 per cent return for the average IA Mixed Investment 20-60% Shares sector fund.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in 2012, the MI Hawksmoor Distribution fund has delivered a total return of 83.5 per cent, compared with a gain of 61.04 per cent for the average IA Mixed Investment 40-85% Shares sector fund and a 58.80 per cent return for the FTSE UK Private Investor Income index.
MI Hawksmoor Vanbrugh has a yield of 1.45 per cent and an ongoing charges figure (OCF) of 1.81 per cent. Meanwhile, the MI Hawksmoor Distribution yields 3.31 per cent and has an OCF of 1.68 per cent.