Passive fund position cuts for Rathbones

Rathbones has cut a number of passive fund positions in favour of active managers in a bid to protect against market falls.

Mona Shah, assistant fund manager on the company’s three multi-manager funds, said the team had made the move after growing concerned that markets in the UK and US were trading at or near record highs.

“It is prudent to cash out [from trackers] at this point,” Ms Shah said. “We need to see earnings coming through for the market to want to climb from here.

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“We feel uncomfortable with investing in equities when they are at all-time highs, and we can’t afford to have much downside risk in our low risk fund. Active managers are better placed to outperform at the moment because they can avoid falling prices. Pockets of value are becoming far fewer than they were.”

This year has seen the S&P 500, the FTSE 100 and the Dow Jones Industrial Average indices all reach record levels, driven by positive economic data from the UK and US economies and aided by the Federal Reserve’s decision to delay the tapering of its bond-buying programme.

At the end of September, two of the three funds Ms Shah works on with lead manager David Coombs and fellow assistant manager Elizabeth Savage – Rathbone Enhanced Growth and Rathbone Total Return – had exchange-traded funds (ETFs) tracking US and UK indices in their top-10 holdings.

But during October the managers sold these positions in favour of “index-agnostic” active funds, bringing in managers such as Miton’s Gervais Williams and boutiques including Edinburgh-based Kiltearn Partners and London-based Egerton Capital in an effort to limit the funds’ exposure to potential market falls.

Ms Shah said the moves had been aimed at taking “stock-specific risk” rather than more general market risk, meaning that – if the decision pays off – the Rathbones funds should be less sensitive to market movements in the coming months.

In addition, the managers have added to a structured product issued by HSBC and linked to the S&P 500 index in the Enhanced Growth and Strategic Growth funds. The product – the HSBC S&P 500 Supertracker – is designed to give investors double the rise in the S&P 500 index while offering partial protection against falls.

As long as the index does not fall by more than 40 per cent, the initial capital invested is protected.

In the three years to November 1, the Rathbone Strategic Growth fund gained 18.9 per cent according to FE Analytics, while the Total Return fund gained 13.1 per cent. The Enhanced Growth fund has gained 13.2 per cent since its launch in August 2011.