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.
He says: “My style isn’t to take massive bets on one asset class. This sounds clichéd but we try and be the tortoise. There will be times when we’re behind, because we’re not taking those big bets. We have 25 to 35 funds within the portfolio. That’s higher than some of our competitors, and it means sometimes our returns don’t look quite as attractive when markets are strong. In Q1 this year, I think we were positive and that’s because we took lots of smaller bets basically and our drawdown has been relatively low.”
Pointing to those holdings that have added to the portfolio’s performance since launch, Mr Coombs identifies US and UK equities, as well as investment trusts and private equity. The manager tends to keep holdings in the fund for a minimum of three years, with the Schroder UK Growth investment trust in the portfolio since January 2010.
But with no signs of “huge value” in any asset classes, Mr Coombs reveals the fund is running 8.7 per cent cash, which he suggests is as high as it’s been since inception.
He continues: “That’s testament to the fact we’re struggling to find places to put that money to work and we do think we’ll get an opportunity in the summer. I’m not sure whether that will be bond markets or equity markets, but I suspect we will have an opportunity to spend that.”
Darius McDermott, managing director, Chelsea Financial Services:
Verdict:
“This fund aims to return between 3-5 per cent above the UK CPI over five-year periods, while having two-thirds of global equity volatility. Over the five years since its launch, it has achieved both these aims, in spite of losing 6 per cent in 2011. The next two years need to have decent returns to keep this up. The underlying funds are less well known and less widely used by many multi-manager investors, which adds diversification to a wider portfolio. David Coombs also taps into the thoughts of the Rathbone Asset Allocation Committee to help position the fund according to their wider views. It is a smaller fund than many of its rivals and very nimble.”
