Best in Class: Comfort in uncertain times

Best in Class: Comfort in uncertain times

There’s nothing fund managers dislike more than a debate with a binary outcome. Also known as Brexit. We’ll either leave or we won’t, but who wants to stake their reputation (and investors’ capital) on it? Instead, investors are looking for options that help them to hedge their bets.

This is relevant not just to whether Britain leaves the EU. Several other issues, perhaps less binary but equally polarising, are keeping managers guessing. Will oil stabilise? If so, in what range? Have central banks made a big mistake on quantitative easing? Is China going to have a hard landing?

Some big calls are being made and while I always like a high-conviction manager, it’s easy to sympathise with investors who aren’t quite so keen on putting all their proverbial eggs in one basket. We’ve seen negative news on all of these issues trigger dramatic falls already this year.

So clients want investments that have lower volatility and lower downside risk than, say, a UK All Companies or a Global fund, while still targeting returns above the average investment-grade, fixed interest offering.

Absolute Return is one space that comes up a lot in this context and there are several funds that stand out. One fund I like for diversification, however, which is tucked away in the IA Unclassified sector and sometimes slips under the radar, is the elite rated Rathbone Strategic Growth Portfolio.

It targets returns of between 3 per cent and 5 per cent above CPI during a minimum five-year period, with a risk budget of two-thirds the volatility of global equities. It is one of the new breed of funds that target risk and then look to maximise returns. Since launch, the fund has shown resilience in falling equity markets.

To achieve this, asset allocation is divided into three buckets: liquidity (fixed interest and cash); equity risk (in which manager David Coombs includes assets highly correlated to equities, such as high yield and emerging market debt); and diversifiers.

This allocation to diversifiers, in particular, allows the flexibility to respond to evolving market challenges. Mr Coombs explores different active strategies and is currently holding a number of long/short funds based on his belief in greater equity and currency dispersion this year. In this light, heightened volatility provides opportunity.

The fund is unique in the multi-asset space in that it will hold investment trusts and funds from very specialist boutique managers, as well as passives, to take advantage of different opportunities as they arise. Yet the fund structure ensures a balanced approach between these and more traditional return drivers.

Mr Coombs has been underweight the UK since last June in anticipation of heightened volatility and a slump in sterling. He’s also kept what he describes as a “healthy position” in high-quality, investment-grade and sovereign bonds since last year, which he says has dampened drawdown during the past quarter’s correction.

And if you were worried about this fund being classed as a “complex product” that would restrict marketing it to clients, Rathbones has just announced it has converted its multi-asset range from a Nurs structure to Ucits at the start of this month, ahead of Mifid II proposals set to come into force in January 2018.