Finding genuine diversifiers means that investors might have to look further afield than they might have realised. Or at least that’s the theme of Hawksmoor Investment Management’s fund manager Daniel Lockyer’s five funds.
In the latest of its series challenging fund of fund and model portfolio managers to create a truly diversified portfolio with just five funds, the co-manager of the recently-launched Hawksmoor Global Opportunities fund said that trying to choose just five funds on a long-term view is very tricky.
When it comes to the portfolio’s construction, each of the funds has an equal 20 per cent weighting.
“Five funds is so concentrated that I think you need to equally weight it. I have equal conviction that each of these holdings will be useful to people,” Lockyer said.
“Some of them on their own might seem a bit strange but in the context of having five together it fits well.”
First up is a convertible bond strategy, a choice that “should get the discussion going” as it is not an asset class typically held by private investors.
Convertible bonds are debt that can be turned into equities shares are certain times during the bond’s life if the holder wishes to do so.
“We feel that convertibles for a balanced portfolio offer the perfect asymmetric risk profile to any investment that you want. If you could have a portfolio that looked like convertibles do then you would have it,” he said.
“You have almost unlimited upside because beyond a certain point you are participating in the equity part of the bond, but you have got downside protection via the bond floor. Once you have that within a portfolio it gives you a really good diversifier.”
To play this theme, Lockyer has chosen the four FE Crown-rated Polar Capital Global Convertible fund headed up by David Keetley and Stephen McCormick, which has delivered a total return of 58.05 per cent since launch.
Performance of fund since launch
Source: FE Analytics
“This is the most strategic-type convertible bond fund out there,” said Lockyer. “There are some quite plain vanilla convertible bond funds but the team at Polar Capital add value through currency allocation, they manage the interest rate risk – so duration management – and they can even gear or hold high levels of cash.
“It is an actively-managed fund with lots of levers they can pull to add value. It is a core holding in our other funds so makes sense to have it within a balanced mandate.”
Sticking with fixed income – and the first of the fund pickers in our series who has chosen multiple bond allocations – Lockyer suggested investors take dedicated exposure to emerging market debt.
“The yields on offer are attractive today – even more so then they were when we though they were attractive earlier this year,” he said.
“The crisis that people are talking about I don’t think is going to materialise and the opportunities that have arisen are because of some idiosyncratic issues from Turkey and Argentina.”
While some countries have account deficits that are at risk of a rising dollar, he said that on a long-term time horizon there is every chance that the dollar will not keep rising.
“There are structural issues in the US with its own fiscal deficit and [president Donald] Trump spending money they haven’t got to boost the economy,” the Hawksmoor manager noted.
However, the key argument for investing in the asset class is that it offers an attractive starting point giving investors a margin of safety.
Lockyer said: “If we are earning 6 or 7 per cent yields on something then it has to go dramatically wrong for us to not get that return.
“Therefore, it might sound a bit dull but if you can lock in a real 6 or 7 per cent each year then that compounds.”
Eventually, he said that the emerging market economies could overtake the Western world and in such a scenario yields would come down leading to spread compression and giving investors attractive double digit returns each year.
But is important to be active in the region, the manager noted.
“You don’t want to be investing across the benchmark because a bond benchmark has companies with the most bonds and therefore the most indebted companies,” he said.
Within this, he recommended the £3.3bn Ashmore Emerging Market Total Return fund, an offshore strategy which has largely avoided problem areas such as Turkey and Argentina.
Turning to equities, Lockyer said that he would include four FE Crown-rated Artemis Global Select, managed by Alex Illingworth, Simon Edelsten and Rosanna Burcheri.
The fund is run on a thematic basis by a team who are not style biased and look for growth but don’t want to overpay for it.
“It is just a well-managed sensible global equity portfolio,” he said. “They are increasingly allocating to structural growth trends and are highly active in the equity market.”
Since its launch in 2011, the portfolio has returned 151.37 per cent, beating the average IA Global sector peer and its MSCI AC World benchmark.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The manager said a particular draw to this fund is its high alpha generation and low beta, something that is growing increasingly important as asset classes look expensive.
“We want managers who are aware of what is going on in the world and what the risks are and have portfolios that will hopefully be insulated a bit from the end of the bull market,” he said.
“It has got some great companies that can grow and make money from here even when mainstream equity markets are looking expensive.”
Staying within equities, he suggested that the soon-to-be-launched Mobius Investment Trust might be another to buy-and-hold for the next 10 years, noting that the firm is “highly likely to be supporting it”.
He said: “There has been mixed opinions I have seen on the launch of this with people saying ‘why would you buy a fund from an 82-year-old’ but I think that misses the point.
“As it is a long-term growth portfolio that we are putting together, if you can get something that yields 3 per cent and it is growing and the companies are growing themselves the compounding effect of income and growth is going to be really powerful by the end of 10 years,” he said.
“We think that this is going to be a good vehicle that ticks all the boxes that we look or. It has talented managers that are incentivised and motivated to make a success of their new vehicle without the constraints of working in big companies with potentially political and management issues.”
The final area he would include in a diversified portfolio for the long-term is private equity, as it follows a theme of companies staying private for longer.
“If you invest in the highest quality managers who identify, invest and support private companies then they can grow them and merge them or do bolt-on acquisitions all out of the limelight and glare of the public market, which demands quarterly earnings growth and can’t tolerate any misses to expectations and are very short term,” he said.
In this space he would back the £718m investment trust HgCapital, which over the last 10 years has outperformed the IT Private Equity sector and FTSE All Share benchmark. (Disclosure: HgCapital Trust recently announced an investment in FE, the owner of FE Trustnet).
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
“HgCapital Trust, I think, is the highest-class private equity fund in the UK,” he said. “They manage exposure depending on the valuations and at the moment they are probably selling more than they are buying and taking advantage of the high demand for these companies.”
The trust specialises in the technology and services sectors, which he noted is a “really good market for the next 10 years”, while the underlying portfolio is currently growing at around 19 per cent per year – much faster than the listed stock market.