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How IBOSS and Thesis are protecting investors differently

04 July 2018

IBOSS investment director Chris Metcalfe and Thesis analyst Ryan Paterson outline how they are defensively positioning their model portfolios.

By Jonathan Jones,

Senior reporter, FE Trustnet

There are numerous ways investors can add diversification to their portfolios whether through traditional assets (such as gold and cash), alternatives (property and absolute return strategies) or downright whacky (bitcoin anyone?). 

Most suggest that no matter which assets you choose, diversification is the one of the best tools an investor has in their armoury to manage volatility and reduce risk as ensuring your assets behave differently in various market conditions is key.

Below, FE Trustnet looks at how IBOSS Asset Management investment director Chris Metcalfe and Thesis Asset Management research analyst Ryan Paterson go about reducing risk and which asset classes they see diversification benefits in.

The biggest difference between the two firms’ strategies comes in their approach to the property sector, where Paterson said the team at Thesis is reducing exposure in favour of infrastructure assets.

“There has been some weaker underlying data coming from the property sector, notably the RICS [Royal Institute of Chartered Surveyors] Survey which paints a subdued picture of occupier demand conditions,” said the Thesis analyst.

“In addition to this, lending activity appears subdued and seems consistent with the falling levels of investment market activity in recent months, as well as reports that development pipelines are tending to be scaled back.”

As such, he has moved the portfolios into infrastructure assets, reducing the weighting to L&G UK Property and adding 3I InfrastructureInternational Public Partnerships and VT Gravis UK Infrastructure Income.

Paterson said: “3i Invests across mid-market economic infrastructure and greenfield projects in developed markets, with a focus on the UK and Europe.

Meanwhile, International Public Partnerships offers long-dated, contractual predictable cash flows mainly from regulated or government-backed counterparties with investments focused on high-quality, Organisation for Economic Co-operation and Development (OECD) countries.

“VT Gravis preserve investors’ capital throughout market cycles with the potential for capital growth and protection from inflation,” he added.

Property has been a real mixed bag for investors over the past decade as bricks & mortar funds have particularly disappointed, returning 34.06 per cent over the period.

Performance of sectors vs indices over 10yrs

 

Source: FE Analytics

Meanwhile, property securities funds have returned 117.07 per cent, 22.67 percentage points above global bonds (as measured by the Bloomberg Barclays Global Aggregates index) but 60.64 percentage points behind global equities (represented by the MSCI World index).

*Please note, while the Investment Association has said agreed to split out the IA Property sector into two (UK property and other property) we have used our own classifications recommended to us by readers and advisers.


While IBOSS’ Metcalfe has steadily increased his underweight position to property over much of the past decade, for the first time over the period he is adding to the sector rather than reducing it.

“We have been slowly reducing our property exposure over the last 10 years but actually it is going to increase in the OIECs from 4 to 5 per cent and this is really about the yields,” he said.

“We don’t believe that yields are going to go very far north of 3 per cent if we base it on the US Treasury 10-year.”

He added that the team are also pessimistic relative to forecasts on the outlook for the US and global economies noting that people are being too optimistic in their expectations.

If the US economy does stagnate, the Federal Reserve will no longer be able to maintain its rate hike program, relieving the pressure on bond yields.

Performance of index over YTD

 

Source: FE Analytics

Earlier this year the 10-year US Treasury hit 3 per cent but since then it has come back to 2.85 per cent and Metcalfe said with yields more likely to fall than rise from here property looks more attractive.

“So, we have slightly increased [our property exposure] and I can see us increasing it again – not because we are fantastically bullish on the outlook for property per se but just relative to the other assets,” he said.

The new fund that has come into its OEIC range is the L&G Global Real Estate Dividend Index, which has been included in the portfolio previously.

“It is a tracker that gives us global exposure alongside the F&C UK Property and we are still holding the Premier Pan European Property fund as well,” Metcalfe said.

“In a world where it is very hard in mainstream assets to get diversification it is one of the ways that we are doing it.”

The other area the teams differ is there use of cash this year. IBOSS’ Metcalfe has so far stuck with his cash weightings which are 4 per cent in the most balanced OEIC product and 5 per cent in the models.

He said: “It has remained fairly steady because, basically, markets haven’t really gone anywhere. So, I don’t think there is anything looking better value – particularly in the equities space.”


He noted that the team remain without any dedicated US equities exposure as the market remains expensive and argued that in fact it looks worse value than it did previously, meaning that its cash has not been to put to work this year.

Additionally, the team are also holding funds such as the JOHCM Global Opportunities fund, which has 17 per cent cash as well as holding cash themselves.

“We know other managers are holding more than they have previously been holding but it ebbs and flows,” he said.

While some are bearish and holding more cash, like the JO Hambro fund, others don’t want to be forced into buying things if they have good flows coming in, meaning they are also currently sat on higher cash.

This goes against the approach employed by Thesis, which deployed half of its cash earlier this year when markets corrected.

One area both agree on is the holding of gold as a diversifier and, as such, the Old Mutual Gold & Silver fund managed by Ned Neylor Layland the favoured vehicle for both Thesis and IBOSS.

The $288.5m fund has significantly outperformed the gold spot price, beating the S&P GSCI Gold Spot index by 23.81 percentage points since its launch in March 2016.

Performance of fund vs index since launch

 

Source: FE Analytics

IBOSS’ Metcalfe has 1 per cent of the model portfolios in the Old Mutual fund and 3 per cent in the OEICs while Thesis’ Paterson holds 1 per cent in its models.

The Thesis manager said: “In alternative assets a weighting to gold is being instituted across all mandates. This will initially be 1 per cent, but is likely to be increased over time.

“The gold weighting can be seen as a diversification of our cash holdings and our chosen holding is the Old Mutual Gold and Silver Fund, which blends highly secure bullion holdings with gold equities and seeks to vary the blend of bullion versus equities and gold versus silver to optimise exposure for the market conditions.”

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