Harris defends ‘flat’ alternatives funds
City Financial’s Mark Harris has stood by his alternatives funds in spite of flat returns, saying the investments have nonetheless provided good diversification from bond and equity holdings.
Mr Harris said he had been left with a neutral performance after two holdings performed well and two others suffered, but planned to hold on to the funds due to their lack of correlation to “traditional” markets.
“[Alternatives] haven’t added lots as a whole. They have been a fairly offsetting combination. But we think these are valuable sources for trying to get returns without having this linked to equities or bonds,” he said.
Holdings included the closed-ended $344m (£223m) CatCo Reinsurance Opportunities fund and the Guernsey-incorporated closed-ended DW Catalyst fund. Also selected are Third Point Offshore Investors, whose manager Mr Harris said “had good returns but struggled a bit this year”, and the SQN Asset Finance Income fund.
The asset class had a significant weighting in parts of the City Financial range, making up around 25 per cent of its £26.4m Multi Asset Balanced fund, which has a risk/reward factor of four [from seven] and sits in the Investment Association’s 20-60% Shares sector.
Meanwhile Mr Harris’s fixed income exposure, which made up about 26 per cent of the Balanced portfolio, included a range of different approaches, taking in high yield and even peer-to-peer (P2P) lending.
The manager said P2P holdings, such as VPC Speciality Lending and Ranger Direct Lending, appealed to him because of their function as a bond proxy: “It gives us the same return profile as a fixed income security.”
With high yield, he is “choosy” because of its exposure to the troubled energy sector, but believed investors are receiving ample compensation from some of the bonds. He said: “Speads are enough to compensate us for anything other than a full-blown recession. If you think there won’t be a recession, you should buy some high yield.”
Another holding in the fixed income category is TwentyFour Asset Management’s closed-ended UK Mortgages fund, which seeks exposure to loans secured against UK residential property and targets a net total return of 7 to 10 per cent a year.
Mr Harris said: “We don’t really have to worry about [residential mortgage] defaults. Even in 2008, the defaults were extremely low.”
Within equities, which made up about 42 per cent of the Balanced fund, he had a small emerging markets exposure, and is waiting to see what form measures for the Chinese economy take – with details for its latest five-year measures being finalised.
He said the funds had a “tiddly bit” of emerging markets. “We want to know more about the Chinese [plan]. That will spur us into activity,” he added.
In Europe, where he holds funds such as BlackRock European Dynamic and Schroder European Alpha Income, Mr Harris is waiting to see if ECB president Mario Draghi ramps up his rhetoric after hinting at an expansion of quantitative easing last month.
He said: “We could increase it more if Draghi keeps saying things like that. We could see credit creation coming through.”
