Scottish Mortgage Investment Trust, Smith & Williamson Enterprise and Janus Henderson UK Absolute Return are three complementary investments that could combine for a higher risk portfolio, according to FundCalibre’s Tony Yousefian.
Research analyst Yousefian suggests a portfolio with a 50 per cent weighting to Janus Henderson UK Absolute Return, a 35 per cent weighting to Scottish Mortgage Investment Trust and 15 per cent to Smith & Williamson Enterprise.
Having previously considered Yousefian’s suggested low- and medium-risk portfolios, below, FE Trustnet takes a closer look at his suggested funds for a higher-risk portfolio.
Yousefian’s suggestions have been used to create a portfolio using FE Analytics, examining various metrics including its portfolio risk score, weighted risk score of holdings and the diversification benefit.
In this case, the furthest back we can take the portfolio is April 2009, since this is when Janus Henderson UK Absolute Return fund was launched.
During this time, the suggested portfolio has delivered a gain of 170.39 per cent, beating the total return of 141.53 per cent seen in the FE AFI Aggressive index, as the below chart shows.
Performance of portfolio since April 2009
Source: FE Analytics
Yousefian’s first choice for this higher risk combination is Baillie Gifford’s Scottish Mortgage Investment Trust, which he defines as “the engine of the portfolio”.
The five FE crown-rated trust is the riskiest element in the portfolio and the one that has delivered the highest returns.
“The managers invest in stocks on a global basis and take a very long-term view, said Yousefian. “They look for businesses with clear and distinctive advantages that enable them to continue to grow in the long term.
“They also have the ability to invest up to 15 per cent of the portfolio in unquoted stocks. An example of this is Spotify, which is looking to IPO later this year.”
Indeed, the trust’s portfolio has 78 holdings and includes 41 unlisted investments, which in aggregate account for around 15 per cent of the overall portfolio.
The largest 30 holdings account for 83.0 per cent of the assets and include well-known names such as Amazon, Tencent, Alibaba, Tesla or Baidu.
The £6.6bn closed-ended strategy is managed by James Anderson and Tom Slater and has had an impressive top quartile performance over one, three and five years, outperforming both its sector and its benchmark.
As the following chart shows, Scottish Mortgage Investment Trust has made by far the highest return of the three funds in the portfolio and is up by 542.71 per cent since April 2009. This, has come with an annualised volatility of 21.08 per cent, the highest of the three by a significant margin.
However, a Sharpe ratio of 0.92 shows the fund has made a good use of the risk or, in other words, has achieved more return while taking on no more risk than its peers.
Performance of portfolio since April 2009
Source: FE Analytics
Smith & Williamson Enterprise and Janus Henderson UK Absolute Return are the funds Yousefian has chosen to complement Baillie Gifford Scottish Mortgage Investment Trust.
“Both funds will provide the portfolio with protection on the downside and reduce the overall volatility to an acceptable level,” he said.
“Both are long/short UK equity funds. After a long period of time when QE has distorted markets and led to good and bad companies moving in the same direction, stock dispersion is finally on the rise, which means the opportunities for these two funds to make money from shorts is also increasing.”
Yousefian suggested a weighting of 50 per cent to the five FE Crown-rated Janus Henderson UK Absolute Return fund.
The fund is overseen by Ben Wallace and Luke Newman, who are experienced users of contracts for difference (CFDs), which pay out based on the difference between the price of an asset when the contract was taken out and when it was closed.
According to the FE Invest team, the £2.6bn fund could be a good option for investors who want to invest in the stock market while limiting risk, as its ability to short stocks has allowed the managers to “limit losses in falling markets in the past while sometimes making a lot of money”.
Yousefian’s third choice is the four FE Crown-rated Smith & Williamson Enterprise, managed by Rupert Fleming, Mark Boucher and Mark Swain.
The £1.4bn fund invests mainly in the UK and aims to achieve positive returns on a rolling 12 months basis, with low risk and low volatility expected, primarily through its use of equities and CFDs.
Smith & Williamson Enterprise is overweight financials, materials, consumer staples and information technology with largest holdings including Prudential, CRH, Unilever and Ashtead Group.
Data from FE Analytics shows the higher-risk portfolio has an annualised volatility of 9.06 per cent, lower than the AFI Aggressive index volatility of 11.46.
FundCalibre’s higher risk portfolio’s volatility
Source: FE Analytics
The portfolio has a Sharpe ratio of 0.92 compared with a figure of 0.60 for the AFI Aggressive index, which shows it has made a better use of risk. The portfolio also has better risk-adjusted returns than the AFI Aggressive index, as measured by the Sortino and Treynor ratios.
Maximum drawdown – which represents the worst possible return of a fund over a period, when bought and sold at the worst possible time – for the portfolio is 12.30 per cent, lower than the AFI Aggressive figure of 16.32 per cent.
Looking at the main metric FE uses to assess how risky a portfolio is, reveals a current FE Risk Score of 67 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 Aggressive index on one metric: diversification benefit, which shows how spread the risk is in a portfolio.
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 7 per cent.