IFSL Brooks Macdonald Defensive Capital, Jupiter Absolute Return and T. Rowe Price Global Focused Growth Equity are three complementary investments that could combine for a medium risk portfolio, according to FundCalibre’s Tony Yousefian.
Research analyst Yousefian suggests a portfolio with a 50 per cent weighting to T. Rowe Price Global Focused Growth Equity, a 30 per cent weighting to IFSL Brooks Macdonald Defensive Capital and 20 per cent to Jupiter Absolute Return.
Having previously considered Yousefian’s suggested low-risk portfolio, below, FE Trustnet takes a closer look at his suggested funds for a medium-risk portfolio by building it in FE Analytics and examining various metrics including its portfolio risk score, the weighted risk score of holdings and the diversification benefit.
The furthest back we can take the portfolio is December 2009 since this is when the Jupiter Absolute Return fund was launched.
Over this time, the suggested portfolio has delivered a gain of 102.27 per cent, beating the total return of 75.10 per cent seen in the FE AFI Balanced index, a representative group of funds selected by advisers suitable for a person in their mid-40s.
Performance of portfolio since December 2009
Source: FE Analytics
Yousefian’s first choice for this medium risk combination is FE Alpha Manager David Eiswert’s T. Rowe Price Global Focused Growth Equity, which provides the growth element to the portfolio.
Overseen by Eiswert since 2012, the five FE Crown-rated fund invests in global stocks that have the potential for above average and sustainable rates of earnings growth, it can also invest in emerging markets.
“It has a wide investable universe and, as a result, will only invest in companies where the manager has the highest conviction,” said the Fundcalibre analyst.
The $546.4m fund’s biggest country exposure is to North America (61.10 per cent) followed by Europe and emerging market countries in Asia Pacific.
It has overweight positions in the information technology, healthcare and consumer discretionary sectors and its biggest holdings include Apple, Amazon, JPMorgan Chase & Co and Salesforce.com.
“While it has made handsome returns for investors, owing to its focused nature, it is a higher risk fund,” the analyst noted.
As the following chart shows, T. Rowe Price Global Focused Growth Equity has made by far the highest return out of the three funds in the portfolio and is up by 174.32 per cent since 2009. This, however, has come with an annualised volatility of 15.68 per cent the highest of the three by a significant margin.
Performance of funds and portfolio since December 2009
Source: FE Analytics
To reduce risk, Yousefian suggests the IFSL Brooks Macdonald Defensive Capital and Jupiter Absolute Return, which both aim to achieve positive returns regardless of market conditions but with “much less volatility than traditional stocks and shares”.
The five FE Crown-rated IFSL Brooks Macdonald Defensive Capital – run by Jonathan Gumpel, Niall O’Conor and Robin Eggar – invests in a portfolio of defensive assets, including preference shares, convertibles and structured notes.
The £530.7m strategy aims to achieve long-term capital growth independent of equity market performance.
The Brooks Macdonald fund’s current biggest exposure is to structured notes (24.1 per cent), convertibles (19.1 per cent), bond and loans (16.5 per cent).
Yousefian’s third choice is James Clunie’s £1.4bn Jupiter Absolute Return, which invests in a global portfolio of equities, equity related securities (including derivatives), cash, near cash, fixed interest securities, currency exchange transactions, index-linked securities, money market instruments and deposits.
Absolute return manager Clunie aims to buy cheap stocks and benefit from a fall in the price of overvalued stocks, which leads the fund to outperform in high-volatility environments in equity markets.
The manager can also limit the risk in the portfolio if he believes the strategy can’t perform, one of the reasons the fund has been included on the FE Invest Approved list.
“The Jupiter fund in particular is a very defensive play, especially in the current market conditions where volatility has increased,” noted FundCalibre’s Yousefian.
Data from FE Analytics shows the portfolio has an annualised volatility of 8.77 per cent, slightly higher than the AFI Balanced index volatility of 8.03 per cent.
FundCalibre’s lower risk portfolio’s volatility
Source: FE Analytics
The portfolio has a Sharpe ratio of 0.62 compared with a figure of 0.44 for the AFI Balanced index, which shows it has made a better use of risk. The portfolio also has better risk-adjusted returns than the FE AFI Balanced, as measured by the Sortino and Treynor ratios.
Maximum drawdown – which indicates the loss that would have been incurred if an investor bought and sold at the worst possible times – is 9.88 per cent, lower than the AFI Balanced figure of 11.48 per cent.
Looking at the main metric FE uses to assess how risky a portfolio is, shows a current FE Risk Score of 62 per cent, significantly lower than the FTSE All Share’s 94 per cent.
Another metric used to examine Yousefian’s portfolio is the current weighted risk score of holdings – which is a calculated weighted risk score proportionate to the percentage weighting of each of the current holdings in the portfolio – stands at 72 per cent.
However, it does score lower than the FE AFI Balanced index on one metric: diversification benefit, which shows how spread the risk is in a portfolio.
The measure, which can’t be lower than 0 per cent and has a maximum of 100 per cent, is the percentage difference between the values of the current portfolio risk score and the weighted risk score of holdings.
Although a high level of diversification doesn’t indicate whether the portfolio is good or bad, the higher the diversification number, the more spread the risk will be and the higher the chances of avoiding large drawdown events.
According to data FE Analytics rates Yousefian’s portfolio diversification benefit is rated as ‘low’, generating a figure of just 11 per cent.