Japan and Europe remain popular for multi-managers

That means, in many cases, finding stable income or capital protection from other sources, including cash, equity income and alternatives.

It is difficult to find a multi-manager with anything but the smallest holdings in developed market government bonds. The teams at Cazenove, Architas, Premier and Thames River hold no conventional gilts, for example. For many, this is a pure risk/reward consideration.

Joe Le Jehan, a manager on the Cazenove multi-manager team, says: “Financial repression is driving yields down and making people want to take more risk, so the idea that government bonds yielding 2 per cent are good value doesn’t fit. With government bonds, the upside is capped at zero and the downside is unlimited.”

On the credit side. Caspar Rock, chief investment officer at Architas, for example, has selective holdings in shorter-dated bond funds or strategic bond funds. However, many managers are also out of the investment-grade end of the corporate bond market completely. Jupiter’s head of the Merlin fund of funds team, John Chatfeild-Roberts, has recently sold his holdings in the M&G Strategic Corporate Bond in the group’s Balanced fund, on worries over inflation.

Mr Le Jehan sold out of most of the funds’ investment-grade corporate bond holdings in 2010. From there he has retained some high yield exposure, believing that while the absolute yield is poor, high yield spreads over government bonds do not necessarily look unattractive. But the Cazenove team has been using cash as an asset class: “We want the option to go and buy something cheap, rather than trying to just hold an expensive asset class for the sake of it. We are not predicting a rise in interest rates imminently but there is potential for a growth surprise if the US improves.”

There is more optimism on equities in spite of the recent strong run. John Husselbee, chief executive of North Investment Partners, says: “We are still cautiously optimistic on equities. There is clearly still value both versus history and versus other asset classes. Equities look attractive for the longer term. Investors can get caught up on the macroeconomic side, but last year economic growth was 1 per cent and the equity market was up 12 per cent.” Most multi-managers still believe that corporates are in good shape with strong balance sheets and resilient earnings.

In common with discretionary managers, there is still a marked preference for cyclical areas in spite of their recent rally. Mr Le Jehan says: “We went to buy domestic-facing cyclicals in the fourth quarter of 2011, when the valuation premium on defensives was huge. In the UK, this was financials, retailers and media. Domestic was the key – we didn’t want to buy China-facing industrial cyclicals, which were on peak profits, peak margins and high multiples.” The Cazenove team has taken some profits but retained the position and will move back into the same cyclical areas if there are signs of growth.

Japan and Europe remain popular markets for multi-managers. Mr Husselbee says that there remains some value to be made up in Europe, in spite of its recent strong run, but that it is a stockpicker’s market. Gary Potter, co-head of multi-manager at F&C Investments, says the group has recently taken some profits in Europe after benefiting from the rally last year.

The real difference between the multi-managers and discretionary managers has been in the former’s willingness to look at alternatives as a means of diversification, or as a means to supplement yield. Mr Le Jehan says: “The idea for our alternatives book is trying to find investments that give us proper diversification, rather than simply low beta versions of equity funds. We are trying to find negatively correlated investments and replicate the type of security otherwise provided by government bonds. We still use funds such as Hugh Hendry’s Eclectica fund and also the Majedie Tortoise fund. We have no credit long/short exposure, simply because we don’t like a lot of the credit markets.”

The extreme valuations being seen in some financial markets are forcing activity on the part of multi-managers. They are being forced to look beyond conventional strategies. It is not an environment likely to favour a light touch approach.

Cherry Reynard is a freelance journalist