FTAdviser.com

Advertising

Multi-managers usually expound the merits of diversification, arguing that the additional layer of selection – and fees – takes the risk-spreading logic of stock funds one step further. Not so John Husselbee, manager of the £23.7m City Financial Multi-Manager Income fund, who prides himself in a “high-conviction”, benchmark-unconstrained approach. “We take a blank piece of paper and look for the best opportunities for making money,” he says.

This philosophy is reflected in the statistics. Over three years to 4 August, the fund delivered returns of 11.4 per cent, ranking it in the top quartile of the IMA Cautious Managed sector, which grew 6.2 per cent on average over the period. But this was achieved with a standard deviation of 2.8 per cent – the very highest in the sector. Moreover, the fund’s performance over the past year relegates it to the third quartile.

The obvious question mark hanging over the fund is: does such an actively managed vehicle belong in the IMA Cautious Managed sector? Or is Mr Husselbee’s investment philosophy is better suited to the IMA Global Growth sector, where the fund sat until mid-2005?

"We understand the rules within the sector, and perhaps we understand those rules better than others," replies Mr Husselbee. "We’re getting the results through understanding the rules and being prepared to use different asset classes and vehicles. Why aren’t other managers taking more advantage of the opportunities in the market to get better returns?"

He also notes that his team already manages a City Financial product in the IMA Global Growth sector, while “Cautious Managed is very attractive from a sales point of view”.

Mr Husselbee, who sat on the committee which drew up the IMA managed sector guidelines, also doubts the usefulness of volatility statistics. “Standard deviation is a measure of risk that has grown up in a bull market. I don’t think it’s the most appropriate measure for the current conditions. If you look at drawdown – the maximum loss over a given period – we sit in the middle of the pack.”

The volatility of the portfolio can in part be explained by its exposure to emerging market equities, particularly China, which behaved like a geared version of the US stock market in the first two quarters. Mr Husselbee’s total equity exposure to the developing world was 22 per cent at the end of June – more than his total fixed income holding.

But this comes as no surprise when you consider his investment philosophy. Like Robin Geffen of Neptune Investment Management, who co-managed the fund before selling it to City Financial in October 2007, Mr Husselbee allocates assets according to long-term global trends.

“A clear trend for us at the moment is that developed markets are regressing towards the mean. We don’t expect GDP to grow at more than 1-2 per cent over the next couple of years, whereas we believe emerging markets are progressing at 7-10 per cent. We’d rather be in equity markets where growth is progressing, as that means corporate profits and share prices are progressing.”

As a long-term investor, he is not unduly concerned by the doubts currently running through the Shanghai stock exchange. “These things don’t go up in a straight line. But when investors start worrying less about inflation and more about growth it’s going to be China and India that perform best,” he says, stressing that China looks very undervalued after this year’s 60 per cent fall.

He also sees value in UK large-cap “income” equities such as banks. “Income funds are the place to be,” he says enthusiastically, citing Bill Mott’s £398m Psigma Income fund and Clive Beagle’s £128m JOHCM UK Equity Income fund, which both appreciated over 16 per cent from 15 July to 14 August, compared with growth of only 8 per cent from the FTSE All-Share.

Mr Husselbee has a 19 per cent weighting in domestic equity, as required by the sector guidelines. While this currently has a bias towards the value funds that have underperformed over the past year, he holds one core fund for diversification.

He compares a fund of fund to a football team, which requires defenders and forwards in the same way that a fund requires small-cap and large-cap or value and growth. “We’re trying to put the right team together to win the game,” he says. But he also believes winning requires a high-conviction strategy. The UK equity strategy is currently to overweight large-cap value. The European equity strategy is to favour large-cap growth. The overall equity strategy is to avoid developed economies as far as the rules permit.

Equities only make up 50 per cent of the portfolio. The rest is a cocktail of fixed income, commodities, absolute return strategies, property, private equity and cash. Under Ucits III regulations, Mr Husselbee can access these asset classes through a range of vehicles, including closed-ended funds, ETFs and structured products as well as Oeics.

Another major trend that informs Mr Husselbee’s asset allocation is the structural shift from a deflationary to an inflationary global environment. He therefore keeps his bond exposure to a minimum. “In a long-term period of inflation the last thing you want to be in is bonds, as yields will rise and capital value will fall. We’ve had very short-duration bonds, near cash,” he explains.

At the same time, he invests in sophisticated corporate debt funds listed on the London Stock Exchange. “Most people just say: 'I need bond exposure so I’ll buy some gilt funds and global bonds and forget about it.' But there are different ways of playing the fixed interest market. It’s about understanding the rules, the sector, and what you’re trying to achieve.”