While the recent return of volatility to markets has prompted some fund managers to declare a ‘stockpicker’s market’, others are not so keen to embrace current valuations.
Last week, Orbis Investments’ Alec Cutler – who manages the five FE Crown-rated Orbis Global Balanced fund – told FE Trustnet that investors could now experience a “full-on, old school stockpicker’s market” for the first time in almost a decade.
Cutler told FE Trustnet that until recently valuations had been driven by non-fundamental-focused trend investing, which had resulted in prices being pushed ever-higher in the post-financial crisis bull run.
However, the recent sell-off inspired by fears of quicker-than-expected rate hikes by the Federal Reserve has now created stockpicking conditions.
Performance of major indices YTD
Source: FE Analytics
As the below chart shows, major indices have struggled in 2018. While the S&P 500 has recovered somewhat and is down by just 0.65 per cent, the FTSE 100 has dropped by 5.5 per cent over since the start of the year. 
The fall in markets has allowed some managers to take advantage of lower valuations. However, not all fund managers are keen to take advantage of the stockpicker’s market.
“It’s the bread and butter of many a fund manager, but not everyone’s a stockpicker,” said Miton’s Anthony Rayner (pictured).
The manager said Miton’s multi-asset team actively avoids meeting companies, noting that its strongest skills lie in identifying macroeconomic trends and thematic ideas to be deployed across different asset classes.
He said: “For equities, that generally means buying, on many levels, ‘boring’ stocks which just do a very good job of reflecting the trend or idea, at a weight that is sensible in regard to its contribution to portfolio risk.
“In practice, we look to buy baskets of stocks, to amplify exposure to the idea, at the same time as minimising stock specific risk.
“So, in fact, we look to reduce the very same stockpicking impact that many fund managers look to exploit.”
Rayner said while other managers might to uncover the next best stock in a space, the Miton team aims to hold stocks that simply move in line with one of their macro or thematic ideas.
“For example, we think it unlikely that the best use of our resource is to decide on either BP or Shell,” said the manager.
“Instead, if we decide to have exposure to oil, unless due diligence suggests otherwise, we might well include both BP and Shell, as well as other oil stocks, but in smaller individual positions.”
Performance of stocks YTD
Source: FE Analytics
As such, the multi-asset funds’ exposure to individual stock risk is “generally low and fairly consistent across the portfolio”.
Rayner said the team’s approach is dominated by pragmatism, whether it involves selling a stock that doesn’t move in-line with one of the team’s ideas or whether that idea doesn’t work.
“With this in mind, there’s also an important psychological advantage in us not visiting companies,” he added.
“We’ve found that keeping companies at arm’s length helps us to be as objective as possible about their role within the macro or thematic basket.
“The last thing we want is to build a rapport with management and allow empathy to develop.”
Rayner said the team instead focuses on carrying out due diligence on companies’ revenue, earnings and debt profile and building an understanding of the broader corporate outlook and how it reflects their ideas.
“Finally, we need to see the share price moving in the right direction, as we’re not contrarian investors either,” he added. “If all of these factors fall into place, we can initiate a small position.”
Rayner is co-manager alongside colleague David Jane on several multi-asset portfolios, including the five FE Crown-rated LF Miton Cautious Multi Asset fund, which they have managed since 2014.
The £521.3m fund is a top quartile performer one and three years, having generated a 14.64 per cent gain over the latter period compared with a gain of 10.11 per cent for the IA Mixed Investment 20-60% Shares sector.
The fund has a broad equity exposure of around 50 per cent allocated across several different regions and countries. Around a fifth of the fund is invested in overseas corporate bonds and a further 16.3 per cent in UK corporate debt.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The largest equity position in the portfolio, according to the latest fund factsheet, are the aforementioned Royal Dutch Shell and BP, which represent 1.1 per cent and 1 per cent of the portfolio respectively. The fund has an ongoing charges figure (OCF) of 0.84 per cent and a yield of 2.37 per cent.
The pair also oversee the five FE Crown-rated MI Miton Cautious Monthly Income fund, which targets an increasing level of income over a three-to-five year rolling period with the potential for capital growth.
Situated in the same sector as its sister LF Miton Cautious Multi Asset fund has delivered a 14.08 per cent over the past three years. The fund has a yield of 3.95 per cent and an OCF of 0.85 per cent.