Launched in 2008 the Spectrum range of volatility-targeted funds from Old Mutual Global Investors essentially aims to produce “as much return as we can, given the risk budget”, explains manager John Ventre.
He notes the funds target a specific range of long-term volatility, which is achieved by “effectively starting with a blank sheet of paper”.
The manager adds: “We don’t start with a premise that we have to hold, say, fixed interest. Fixed income has to earn its place in the portfolio like any other asset class in terms of being a good use of risk budget.”
In terms of process, the approach is the same across the range, but tailored to the specific risk budgets of each numbered fund.
The manager adds: “Any investment process should adapt and change. I think over time we have used more flexibility at the sub-asset allocation level to add value through selecting, for example, which parts of the fixed income market to be invested in.”
The investment process aims to try and forecast future volatility, return and correlation as Mr Ventre says these are the three things that enable the team to build the optimal asset allocation at different risk levels.
“We have some help in the form of some actuaries from Towers Watson,” he adds, “as some of the inputs are more actuarial in nature rather than economic.”
Macro factors do affect the process, mainly as long-term drivers, although the manager notes at a sub-asset level that they do pay some attention to macro conditions in terms of whether there is a positive or negative change.
He adds: “[This is] effectively economic change, corporate change and liquidity change/price change, which we call technicals. We think those risk factors should be reflected in valuations.”
According to the fund’s Kiid, the risk reward indicator for the Spectrum 5 fund is at a level 5 out of 7, while the ongoing charges are 1.91 per cent for the A accumulation share class.
Looking at the Spectrum 5 fund, which sits in the middle of the range, the performance has been steady, with a five-year return to June 9 of 55.71 per cent. As these funds sit in the IMA Unclassified sector it can be difficult to compare like with like, but using the recently launched risk-targeted sectors from FE, the Spectrum 5 fund comfortably outperforms the UK RTMA Risk Band 2 (FE Risk 30-50) sector average of 47.16 per cent.
Mr Ventre notes: “We select active managers in each asset class. It is a multi-manager fund and what we try and do is make our asset allocations independently from manager selections, so we run a number of overlays.
“For example, we’ll invest in a Japan manager and then express our view either negatively or positively with a futures overlay rather than by trading in and out of the manager. We do that because you can destroy a lot of value of active management in transaction or turnover costs.”
He highlights the low turnover of the fund with an average holding period of roughly five years, although this year the team has added an Eastern European manager and some Norwegian high yield.
“This was to add some dedicated Eastern European management to the fund to take advantage of what we saw as an increasingly large-value opportunity emerging in that asset class not just at a macro level but also a micro level.
“We like to add value incrementally by trying to get a lot of things right and doing it by strike rate rather than making two or three hero calls.”
He highlights the exposure to US growth among the winners in the fund, but acknowledges that emerging market exposure has “cost us, as with most people”. But he adds: “We’ve been gradually adding EM exposure into the weakness in that asset class, for us its getting too cheap relative to developed markets.”
Expert view
Martin Bamford, managing director and chartered financial planner at Informed Choice:
Verdict
“Old Mutual offers a range of these Spectrum Funds, from levels 3 to 8, which covers 95 per cent of investors. This fund has performed broadly in line with the sector average over time, so outperformance is not the reason for using it, but instead ensuring a comfortable match between risk tolerance and risk outcomes. It is always better to select single-asset class funds and tailor a portfolio to specific investment objectives, but in the absence of a full advice service, this fund and its cohort could make a reasonable alternative.”
