A revision of the return benchmark for the Rathbone Strategic Growth portfolio earlier this year has allowed the managers the flexibility to meet its target without significantly increasing the risk in the current economic environment.
The £62.76m multi-asset fund now targets a return of between 3-5 per cent above UK CPI, compared with an earlier return target of CPI +5 per cent. Elizabeth Savage, research director and co-manager of the fund, points out that having realistic objectives is key to the philosophy of the fund.
She explains: “Sometimes this necessitates the need to evolve in line with market conditions. Earlier this year, we revised the return benchmark to preserve the strategy’s risk target.”
The fund seeks to target a volatility of two-thirds of global equities, as measured by the MSCI World Equity index. Ms Savage, who co-manages the fund with David Coombs, head of multi-asset investments, notes the fund itself is designed as a core holding for medium-risk investors, and adds that the strategy is only suitable for investors “who are able to commit money for a minimum of five years”.
The managers use a disciplined asset-allocation framework and a forward-looking assessment of correlation, risk and return as the cornerstone of their investment process. Asset classes are then divided into three distinct categories – liquidity, equity risk and diversifiers.
Ms Savage adds: “Being overweight/underweight by geography, therefore, is not as important as the relative positions in these classes.”
The equity-risk category includes all asset classes, with a high correlation to equity markets as well as equities, and covers all asset classes which are expected to lose value or become illiquid during periods of market distress. This can include corporate bonds rated below ‘AA’, all equity markets, private equity, industrial commodities and long hedge fund strategies.
Liquid assets are securities that are expected to remain liquid during periods of market distress or dislocation, which can be referred to as safe havens, such as sovereign bonds and cash.
“In selecting funds, we ignore quartile rankings and seek strong and consistent risk-adjusted returns and need to understand how correlations are likely to move over time. We do not blend managers; instead we pick one manager per strategy,” says Ms Savage.
Since launch in June 2009 the Rathbone Strategic Growth has clearly achieved its target with a total return to August 22 2013 of 44.72 per cent, beating both the CPI + 3 per cent figure of 28.54 per cent and the CPI + 5 per cent figure of 39.26 per cent, according to FE Analytics.
In addition, for the 12 months to August 22 the total return of 11.4 per cent outperformed its upper target of CPI + 5 per cent by 4.55 percentage points.
Ms Savage says: “Over the past 12 months, we tilted the portfolio away from defensive dividend-payers into more cyclically-orientated equity strategies on valuation grounds, and against a backdrop of stronger economic data in developed markets. Funds we have added include Legg Mason Clearbridge US Aggressive Growth, Cazenove European Income and Kiltearn Global Equity.
“We also reduced our exposure to emerging markets to below 3 per cent, our lowest since inception, as we believe structural headwinds remain, not least of all slowing growth in China and falling commodity prices. However, we believe the tough action taken by the new Chinese administration is positive over the medium term.”
Ms Savage adds that in the past 12 months notable gains came as a result of discounts narrowing on a number of investment trusts, which compounded solid net asset value performance, such as the Schroder UK Growth, and the Value and Income Trust.
Investors looking for a solid, well-diversified portfolio that is flexible enough to take advantage of opportunities while maintaining a clear risk target, should seriously consider this option.
EXPERT VIEW
Martin Bamford, chartered financial planner and managing director, Informed Choice:
“This fund has a four-year track record now and has been doing quite well. It targets a return of 3 per cent to 5 per cent above CPI inflation with lower volatility than global equities, a goal which will suit many growth investors. At only £60m I would have concerns about the long-term commercial viability of this fund for Rathbones. The fund offers a good mix of well known and lesser known funds, with Brown Advisory American and Heronbridge UK Equity both featured in the top-10 holdings.”
