From Special Report: Multi-Manager Funds - April 2012
A more nimble approach is required
How are multi-managers navigating the markets and what strategies are they using to boost returns?
A resuscitation in sentiment in global markets, following the European Central Bank’s (ECB) three year long-term refinancing operation (LTRO) and more positive economic data from the US, has prompted some of the UK’s leading multi-managers to take a more bullish approach.
Typically, multi-manager funds aim to achieve long-term returns for their clients according to a number of different objectives. However, as the volatile markets of the past five years persist, multi-managers agree that a more tactical, nimble approach is now required when allocating investors’ money to different asset classes.
“What we don’t do is go blindly into it. We make changes as circumstances change,” says Tim Gardner, co-manager of multi-manager funds at Legal & General Investments.
Most recently, as the situation in Europe has moved to the back burner, the flight to the relative safety of assets such as US treasuries and UK gilts has started to fade away.
While investors fled riskier assets for top-quality government bonds in 2011 off the back of volatility in markets, the LTRO has reduced the perceived risk of losses in markets, or at least those attributable to the eurozone crisis. Investors have moved out of the safe haven of top-quality government bonds, putting upward pressure on their yields.
Multi-managers have therefore been selling some, if not all, of their exposure to the asset class. Graham Duce, co-head of multi-manager at Aberdeen Asset Management, says: “We have got minimal exposure to government bonds, as we feel that there’s little value to be had in sovereign debt with yields at these levels and we would expect in the medium term for yields to be back up. Obviously, yields have been suppressed by incredibly lax monetary policy and the intervention by authorities, which essentially had flattened the yield curve.”
Ian Aylward, senior portfolio manager at Aviva Investors, says his team is “quite wary for the future” of government bonds, whose yields were running below inflation at the start of this year. “We sold out of our gilt and government bond funds at the turn of the year. With yields on the 10 year UK gilts at 2-2.2 per cent we see no value,” he says.
Mr Gardner agrees: “We had a position in gilts last year and early this year, but we basically sold out early this year to lock in profits when gilt yields came down, as valuations no longer looked attractive.”
While managers have been moving out of sovereign debt, however, most appear to have taken advantage of the big difference between the yields on top-quality government bonds and corporate debt. As a result, a number of them have bought into high yield bonds.
“High yield I guess is an area that we added to in January, and we continue to be more optimistic there. With yields above 7 per cent we think it still offers a bit of value,” says Mr Aylward.
Mr Gardner says that he initiated a position in high yield in his portfolios in October 2011, when spreads on BB-rated bonds had moved out to more than 6 percentage points above US treasuries.
“The market turmoil in August and September last year saw high yield spreads move outwards and therefore high yield bonds fell in value. We initiated a new position in a global high yield bond fund, run by US company MacKay Shields, to take advantage of that.
“We’ve been adding to that position in recent months, which has benefited performance, because high yield has done quite well. Those spreads are not as wide today as they were in October, but we still think they more than adequately compensate investors for the risk of investing in high yield,” he adds.
Mr Duce disagrees, however. While he was overweight credit towards the end of last year, he believes that the market is looking shaky again.
“We have reduced our high yield position because we think that spreads have compressed quite significantly. When you look at things like US high yield spreads, they have come in from 9 percentage points to 5.5 percentage points. From talking to a number of our credit managers in the past few weeks, the liquidity is still quite difficult in the credit market. So we’ve also taken a bit of risk off our fixed income allocation.”
The manager says that he has cut back on holdings like the Kames Capital High Yield Bond fund. “This was a top down call, as from a bottom up perspective we do think that Phil Milburn is an excellent manager. If you look at how he has managed his portfolio, he’s been very astute to dialling down and dialling up the risk. But I was talking to him in the past couple of weeks ago and he has been lightening the load as well.”
In other areas of the market, managers are also looking at other opportunities to buy riskier assets after falls last year and the rally in the first quarter of 2012.
Mr Gardner takes equities as an example. “Clearly there has been a strong run up in equities over recent months, particularly if you are in the US – the S&P is back above 1,400. We’re quite positive on the long term prospects for [natural] resource equities, particularly energy and gold, and we have been adding back to some of our Asia and emerging market equities, as we think valuations are looking more compelling there.”
Mr Aylward takes a similar view on Asian stockmarkets, and has added UK equities into the mix. “We have been overweight equities for most of this year and slightly increased that overweight recently. We’re roughly 4 per cent or so overweight our benchmark, almost exclusively played through the UK and Asia. The reasons being that indicators in the UK suggest that we are going to avoid a double dip [or a second recession]. We have a bias away from the large caps in the UK towards the mid cap space that is more exposed to the UK domestic market, so we will hopefully capture the improvement that we think is going to come through there. More importantly, the dividend yield on the UK stockmarket as a whole is very attractive.”
However, most multi-managers agree that Europe is still an area that should be avoided. Mr Aylward says his team’s exposure to equities is underweight Europe, as he believes that the austerity measures are going to be “painful”.
Mr Duce agrees: “We cut back our exposure to Europe quite aggressively in the first quarter of last year and now of course it has been a strong beneficiary latterly. We still think there are economic problems and indeed something we’ve been watching very closely is the spreads on Spanish debt.”
Joe Le Jehan, analyst in the multi-manager team at Cazenove Capital Management, disagrees, however, saying this may be the perfect time to be buying back into European equities. “We’re at a point where valuations just look cheap and are pricing in the recession that everyone’s talking about. So we started buying things like the Neptune European Opportunities and Cazenove European equity funds.”
He adds that more economically sensitive or cyclical sectors should be in for a good year in 2012, so the Cazenove team has increased its weighting in cash and is looking for the right opportunities to reinvest it.
“If you just look at the UK equity market last year, really defensive sectors like tobacco outperformed the real cyclicals like miners by 60 or 70 per cent, and we feel it’s quite unlikely that that spread of outperformance is going to be repeated, so we’re happier having a more cyclical or positive portfolio,” he says.
However, given that early rallies in the past two years have been followed by stockmarket falls in the summer, investors may be forgiven for thinking that multi-managers should approach this year with a certain amount of caution.
Simona Stankovska is features writer at Investment Adviser