IBOSS Asset Management has reduced its passive exposure to 20 per cent in its range of funds, with fixed income exposure being the main area investment director Chris Metcalfe has added active managers.
However, Metcalfe said that his team will be adding more passive equity exposure to regions including Europe, global emerging markets (GEM) and Asia.
In February last year, the investment director outlined how the team had increased its passive exposure to 30 per cent, but this has since been brought back down this year.
One area IBOSS has focused mainly on adding active managers is within the fixed income space, where they have implemented two new holdings.
“Relative to our history our weightings haven’t really changed but I think what’s changed is what we are holding within,” Metcalfe said.
“The most recent stuff which came in a couple of weeks ago is within the OEICs’ fixed income.”
Previously, he had added passive exposure for two reasons: because they are cost-conscious and wanted to give investors the best possible returns for the right price, and because the yield compression was likely to make active management difficult.
He said: “As yields were getting particularly compressed we took the decision that it was going to be difficult for a lot of active managers net of fees to produce positive returns.
“So we increased the use of passives within fixed income and that has proved to be a pretty good strategy which has worked quite well for us if you take 2018.”
Performance of sectors vs index over YTD
Source: FE Analytics
Indeed, a look at all of the fixed income sectors in the Investment Association (IA) universe shows that none have outperformed the Bloomberg Barclays Global Aggregates index over the year-to-date.
Metcalfe noted: “Year-to-date there is only gilts which have shown a positive return and that has only just happened. Basically you haven’t been paid for holding fixed income. You might as well have been holding money market.”
However, he said there is the potential to make higher returns from fixed income from here, partly because yields have risen to a more acceptable level in the US.
Indeed, having peaked at slightly more than 3 per cent early in the year, the US 10-year treasury yield has settled at around 2.85 per cent.
“Because the US has got to where it is, I think now is the chance for active managers to basically ride these yields back down from here,” he said.
“And there is likely to be considerable volatility, which is good for active managers and for that reason we believe it is worth paying the active fee.”
As such, IBOSS has brought in two funds to the OEIC portfolios – TwentyFour Dynamic Bond and Artemis Strategic Bond.
Starting with the five FE Crown-rated Artemis fund, Metcalfe said the team has followed the managers for years and have previously held the Artemis High Income fund.
They sold out of the income fund because it held equities as well as bonds and they wanted to bring the asset allocation decision in-house, so added the £1.3bn strategic bond fund instead.
“In the end we changed to strategic bond because we wanted to control the asset allocation. It is their long-term track record and that the duo that run it have been together for a long time,” Metcalfe said.
“At Artemis, they are quite candid when going through what they’re holding and why they’re holding it, so we do feel like we get a good understanding of what and why and how it fits into our overall asset allocation.”
He said that within IBOSS’ balanced fund, the team hold around 25 per cent in fixed income so choosing the right managers is important.
Run by Alex Ralph and James Foster since its launch in 2005, Artemis Strategic Bond has returned 97.4 per cent since inception and has been a top quartile performer in the IA Sterling Strategic Bond sector over three and five years.
Performance of funds vs sector over 5yrs
Source: FE Analytics
The other team Metcalfe has added is the five crown-rated TwentyFour Dynamic Bond fund, which has £1.7bn in assets under management.
It too has been a top quartile performer over the past five years and has returned 60.06 per cent since its launch in 2010.
“TwentyFour is just a fixed income house and they stand or fall by their results,” Metcalfe said. “They have got a wealth of experience with some top managers and they have got a really good track record since launch.”
However, there are areas that IBOSS has been, or will be, adding passive exposure to. Due to the dispersion of returns created by the uptick in volatility, Europe, Asia and GEM are three regions the team will take on passive exposure.
“We are bringing trackers into Europe, Asia and GEM and that is just to give us specifically non-active managers because what we are seeing across all asset classes be it equity, fixed income or property is massive diversification of returns,” Metcalfe said.
Taking the emerging markets as an example, while the team owns three active managers – Invesco Perpetual Global Emerging Markets, Janus Henderson Emerging Markets Opportunities and Newton Global Emerging Markets – it also owns the L&G Global Emerging Markets Index tracker.
All three active funds have struggled year-to-date while the passive vehicle has been the best performer, although it is still down 5.67 -per cent.
Performance of funds over YTD
Source: FE Analytics
This has primarily been because the active managers are underweight China which, until recently, has led performance and it is for this reason the team owns the index fund as well, Metcalfe said,.
“We’ve always had an issue with managers who will say they won’t invest in a particular area. For a while we couldn’t find managers that invested in Russia for instance. We want people that look at the countries on their merits and move accordingly,” he said.
“Overall we expect the active managers to outperform but what the tracker has done is dampen down the volatility and negative returns.”