David Coombs, lead manager of the Rathbone Multi-Asset Strategic Growth Portfolio fund admits that its aim to produce an equity-type return for long-term investors sounds “bland”.
He acknowledges long-term equities have delivered approximately inflation plus 5 per cent, so on the basis that investors do not always invest for the long term, the fund targets a return of inflation plus 3-5 per cent. “We expect, over seven years, to achieve CPI plus 5 per cent, but if you give us less than seven years, then CPI plus 3 per cent is more realistic. The longer you invest in the fund, we would expect to achieve the higher end of the range,” the manager explains.
The portfolio also has a second benchmark, or rather a formal risk target, which is two-thirds the volatility of the MSCI World Equity index. Mr Coombs, who is supported on the fund by assistant manager Elizabeth Savage, explains that because it has a real return target and a real risk target, the fund uses a “risk budget” approach.
Asset classes are grouped into three, the first of which is equity risk encompassing equities and those asset classes the manager considers are highly correlated to equities, such as high-yield bonds, emerging market debt and some currencies and commodities.
He continues: “The other two asset class groupings are liquidity, so very highly liquid investments that you would expect to have a positive return during periods of flight to quality. The final asset bucket is diversifiers, again with a very low correlation to equities, but with slightly less predictability, so hedge funds, commercial property, gold and infrastructure.”
Mr Coombs frames the risk target theory: “If we’re aiming for two-thirds equity risk, your neutral equity risk in your portfolio would be 66 per cent in those asset classes. If we wanted to go overweight risk, because we thought markets were cheap, we’d go above 66 per cent.”
The fund currently has 71 per cent in equity risk, meaning it is overweight risk assets versus its risk budget. That perhaps explains why it is at the slightly higher end of the risk and reward profile at level four on its KiiD, and with an ongoing charge of 2.32 per cent.
“Of our equity risk bucket, currently 62 per cent is in equities, which leaves nine per cent in a mixture of loans and overseas credit funds, because we see very little value outside equities,” notes the manager.
Since its launch in June 2009, Mr Coombs says the £78.82m fund has hit both its risk and return objectives. According to FE Analytics, it has returned 16.29 per cent in the three years to May 30 2014, dropping off to 2.65 per cent in the last year.
But the manager observes that the portfolio has “not been paid for risk” during those five years, as a result of the double digit returns in fixed income. Nevertheless, he believes the fund has had a better time in the past 12 months than some of its peers.