Merlin turns its back on buybacks
John Chatfeild-Roberts’ Merlin multi-manager team has claimed a major investment theme of recent years has come to an end as it overhauls its US and global equities exposure.
The team, which runs £9bn across the range, has removed the PowerShares BuyBack Achievers exchange-traded fund (ETF) from the £571m Worldwide portfolio and reduced global equity positions across the range.
The Powershares ETF, which made up 9 per cent of the Worldwide fund at the end of 2015, has been sold, according to manager David Lewis. He said the team believed companies boosting share prices by buying back their own debt – as US firms did to the tune of $700bn (£500m) last year – would become less favoured by investors.
“While we tend to focus on buying active managers for our portfolios, we bought this ETF for the Jupiter Merlin Worldwide portfolio to play a specific theme,” he added.
“We believe the general trend of outperformance from companies which buy back their own shares may now have played out, and so have sold it. The proceeds of the ETF sale have been reinvested in some of our favoured active managers.”
The latest Bank of America Merrill Lynch global fund manager survey showed a growing wariness about debt buybacks: the proportion of managers who believe payout ratios are too large reached the highest level in five years last month.
Elsewhere, the decrease in the Merlin team’s global equities position may have stemmed from a decision to cut back exposure to the Aptus Global Financials fund. Figures from Morningstar show the Aptus portfolio saw an estimated net outflow of £251m in February, bringing its total size down to £537m. The Merlin managers’ exposure to the financials fund had topped £500m as of the fourth quarter of 2015.
Jupiter and Toscafund Asset Management, which runs the Aptus product, declined to comment. But data from Jupiter shows notable reductions in the Merlin team’s global holdings.
The £1.8bn Jupiter Merlin Growth fund’s weighting to a pair of global funds, Aptus and Terry Smith’s Fundsmith Equity fund, fell from 16.6 per cent at the end of 2015 to 11.7 per cent in late February.
In the £3.7bn Merlin Income offering, the global equity allocation (Aptus and M&G Global Dividend) dropped from 8.8 per cent at the end of 2015 to 5.9 per cent in late February.
Financials had a torrid start to 2016, as investors fretted over the potential impact of negative interest rates on banks – worries amplified by Japan’s introduction of negative rates in January, and the European Central Bank cutting its deposit rate further into negative territory in March.
A note from the Merlin team added: “This accelerating acceptance that developed world economies at this stage in the cycle should have rates close to zero and even negative, as some already are, gathers pace. Indeed the Fed told US banks, undergoing their annual ‘stress test’ of financial resilience, to model among their stress scenarios the sensitivity to negative rates in the US.”
The Merlin managers said their portfolios had come through a difficult start to the year “in good shape”.
The team’s Growth and Balanced portfolios have continued their recent recoveries, and remain first and second quartile over most time frames, but the flagship Income portfolio has fallen back once again. The £3.7bn fund is fourth quartile over one and three years compared with its IA Mixed Investment 20-60% Shares sector.
CHANGING COURSE
£251m
Estimated outflow from Aptus Global Financials fund in February
9%
Proportion of Merlin Worldwide held in BuyBack ETF prior to sale