The shift, which began towards the end of 2011, saw the managers sell out of traditional ‘defensive’ managers such as Invesco Perpetual’s Neil Woodford and Artemis UK equity manager John Wood.
“We really made a material shift out of what are traditionally seen as defensive shares and funds and bought what we felt were rather undervalued and relatively cheap areas of the market,” Robin McDonald, co-manager of the fund explains.
The manager says that in 2011 “anything that was perceived to be remotely risky was trashed – banks and consumers. We took the opportunity in the fourth quarter [of 2011] to pick up in those areas and we have been running with that strategy ever since.”
The most recent story that has made its way into the portfolio is the commodity sector, particularly miners, which this year have fallen out of favour.
Mr McDonald says: “Miners have gone from being market darlings in 2010 and leaders of the market in the past decade to being the most popular short among hedge funds and the most underweight sector in the long-only community.
“They have dramatically underperformed, they are undervalued, under-owned and unloved, and those are the types of things we find interesting.”
Mr McDonald explains that the investment process starts from the top down with base-case scenarios in which the managers create numerous outcomes for the market.
He says: “It starts with the bigger picture the majority of the time. When we look to populate the portfolio, we are looking for the most efficient expressions of the views that we have.
“Going back to 2011, we weren’t necessarily forecasting a rapid acceleration in growth and were [instead] focusing on the unloved sectors. The likes of Fidelity’s Special Situations fund was a good expression of wanting to target those under-owned, unloved areas of the market.”
With regards to the recent inclusion of commodities, Mr McDonald explains: “It has become quite a contentious call. We may be wrong, we may be early, but the market’s expectations right now are fairly low and if for any reason those expectations changed, the shares have a good way to run from a low base.
“We first started buying BlackRock Gold and General towards the end of the second quarter [of 2013] and that has been pretty good for us so far. That is a relatively modest position at 1.5 per cent. Most recently, we bought JPMorgan Natural Resources, but again it is a small position at 1 per cent.” Mr McDonald adds, however, that as the newest idea in the portfolio, they may well “build that a little further”.
The fund has a good track record, delivering top-quartile returns in both one- and three-year periods and a second-quartile return across five years when compared with its IMA Mixed Investment 20-60% Shares peer group, according to data from FE Analytics.
On a discrete basis, the fund slipped into the fourth quartile in 2010 when compared with its peer group, which the co-manager attributes to being positioned too defensively.
Year to date to August 30, the fund has almost doubled the sector’s average return of 5.5 per cent, posting a gain of 9.28 per cent.
Mr McDonald adds: “This has been one of the most profitable bull markets in recent history, but the problem for many fund managers now is that there aren’t that many cheap securities around. The past 18 to 24 months has gradually seen the majority of the undervalued areas become more expensive.”
Regardless of this problem facing fund managers, the two, based on past performance, have certainly demonstrated their ability to be in the right place at the right time.
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services:
Verdict
This is one of a range of funds run by Marcus Brookes and Robin McDonald who have worked together very successfully for a number of years at various fund houses.While 2010 performance disappointed relative to the sector, generally it has done very well and cumulative figures are impressive, helped by the fact that Cazenove have managed to keep costs to a minimum – on-going charges are just 1.59 per cent which is very good for a multi-manager product. In most periods it has achieved its objective of capital growth in excess of inflation (CPI + 4 per cent). The one question mark has to be the integration of the Cazenove multi-manager team with the Schroder Portfolio Solutions team. The Cazenove managers will continue to manage the fund and it is hoped that they will adjust quickly and positively to their new working environment.