Skip to the content

Brooks Macdonald’s five funds for a truly diversified portfolio

14 September 2018

Head of multi-asset Jonathan Webster-Smith is the next to take up FE Trustnet’s challenge of creating a perfectly diversified portfolio with just five funds.

By Jonathan Jones,

Senior reporter, FE Trustnet

Man GLG UK Undervalued Assets, Standard Life Global Smaller Companies and Schroder Asia Total Return are all funds that when blended together as part of a five-fund portfolio should give investors good diversification, according to Brooks Macdonald’s Jonathan Webster-Smith.

The Brooks Macdonald head of multi-asset is the next to take on FE Trustnet’s challenge to create a truly blended portfolio from just five funds.

The below portfolio is aimed a balanced investor looking to invest for 10 years and has a focus on managers with a defined process.

“For us we want to know what people should be doing so we can track it and if they go off course we can [hold them to account]. If they have a logic or process it makes life a bit easier,” Webster-Smith (pictured) said.

However, one area he has ignored is fixed income, which is used traditionally by multi-asset investors as a hedge to their equity allocations.

“Fixed interest we are slightly nervous of because of the rising interest rates and inflation so we went for an alternative instead,” he said. “Over the next 10 years I’m not sure I would – if you don’t have to – own it.”

Instead of fixed income, the multi-asset manager has opted for an alternative fund – specifically a long/short portfolio.

“The purpose of this was to try to find something that was uncorrelated to the MSCI World,” Webster-Smith said.

He chose the Old Mutual Global Equity Absolute Return fund run by Amadeo AlentornIan Heslop and Mike Servent.

“This fund, which has a modest OCF when you consider other things in the alternatives sector at around 81 basis points, has a negative correlation to the MSCI World over three and five years,” he explained.

Indeed, over both three and five years the fund has a negative correlation to the global equities benchmark of 0.2.

Performance of fund vs MSCI World over 5yrs

 

Source: FE Analytics

The multi-asset manager said: “Given we are restricted to the five funds we have tried to give some balance if equity markets aren’t performing you want to have something else in there – that is the logic.”

The fund is made up of 300 long positions and 300 short positions and is quantitatively-driven, analysing the state of the market and manipulating accordingly.

It takes into account style bias such as growth, value and momentum as well as market capitalisation trends to adjust to market conditions.


This pairs with four equity funds, the first of which is the $2.9bn Polar Capital Global Technology fund run by Ben Rogoff and Nick Evans.

“Technology is just a hugely growing theme to the market and to life in general and over the next 10 years I don’t think we will suddenly stop talking about the technology advancements that we are making,” the Brooks Macdonald multi-asset head said.

“It has got the potential to achieve substantially better earnings growth than the broader market and substantial earnings growth in the end should feed through into higher share prices.”

The technology sector has been one of the major drivers of returns for investors over the last decade and the fund has been one of the best at taking advantage of this.

It has been the best performer in the 11-strong IA Technology & Telecommunications sector, returning 528.09 per cent over the last 10 years.

Performance of fund vs sector over 10yrs

 

Source: FE Analytics

The managers focus on high quality, profitable companies with strong balance sheets, something Webster-Smith said is important when investing in the sector as for every successful company “there are 100 that fail”.

“Given they are looking for growth themes there is generally high barriers to entry which gives them sustainable pricing power and tight cost controls which is another thing they are looking at,” he added. The fund has a clean ongoing charges figure (OCF) of 1.16 per cent.

Staying with global funds, the manager of the IFSL Brooks Macdonald Balanced fund said he would also include the five FE Crown-rated Standard Life Investments Global Smaller Companies fund headed up by Alan Rowsell.

Smaller companies are often under researched and undervalued, he said, and the fund should add genuine diversification versus his more large-cap orientated equity strategies.

“When looking at it in the small-cap world we could have gone for a UK or a US small cap fund but given our limited choice a global fund works,” he said.

“There are better small-cap opportunities rather than just sticking to the home UK market so that is why we would go for the global small-cap.”

The fund has been a top quartile returner in the IA Global sector over one, three and five years and since its launch in 2012 is up 216.89 per cent.

Originally managed by both Rowsell and FE Alpha Manager Harry Nimmo before the former took sole charge in 2016, the fund is another that looks for high quality companies and uses the firm’s matrix process to screen stocks.

“It is one that is trying to mitigate downside where he can. In small-cap that is quite powerful and it helps to blend with some of the more cyclical funds that make up our portfolio,” said Webster-Smith. The fund has an OCF of 1.06 per cent.


There are two funds left and both are region-specific. First up is FE Alpha Manager Henry Dixon and Jack Barrat’s Man GLG Undervalued Assets.

The £1.1bn portfolio invests with a value bias, something which has been a headwind as the growth style has been in favour over the last decade.

Despite this, it has been a top-quartile performer over one and three years, outperforming the IA UK All Companies sector and FTSE All Share index since its launch.

Performance of fund vs sector since launch

 

Source: FE Analytics

Webster-Smith said: “Growth stocks have performed particularly well over the last 10 years driven by falling interest rates and quantitative easing and the value style has been pretty much out of favour.

“We believe there are some good long-run opportunities and a great way to diversify from some of the growth companies that some of the other funds have.”

Similarly, in more recent years the UK has also been unloved as Brexit has cast a shadow over the market, meaning that investors are getting undervalued assets in an undervalued market.

“Making this for 10 years I am hoping that a decade down the line we won’t still be talking about Brexit. Some of that will lift and I think therefore you have some great upside potential,” the Brooks Macdonald manager said.

Man GLG Undervalued Assets has a yield of 1.95 per cent and an OCF of 0.9 per cent.

The final fund is one that caused the most debate among the Brooks Macdonald team, Webster-Smith said, but in the end they went for Schroder ISF Asian Total Return.

“The logic for Asia is that over the next 10 years we would expect to see a domination of the West move more towards China and Asia and those markets,” he said.

The $4.3bn fund is managed by Lee King Fuei and FE Alpha Manager Robin Parbrook and has beaten the MSCI AC Asia Pacific ex Japan index by 135.76 percentage points over the last decade.

“As an approach it has unconstrained stock selection which I think is important around Asia and therefore you are getting significant diversification from the benchmark,” added Webster-Smith.

The fund is focused on bottom-up stockpicking with a macroeconomic overlay and is able to apply a degree of hedging where appropriate. It has a yield of 1.07 per cent and an OCF of 1.31 per cent.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.