Hawksmoor’s Ben Conway has begun a shift towards closed-ended funds and cut down equities as a “scarcity of value” causes havoc for asset allocation.
The co-manager of the £55.2m Hawksmoor Distribution portfolio admitted he has been concerned about valuations since the start of 2014, compounded by the way asset prices have moved.
He said: “Risk assets overall have been correlated as a result of the backdrop of extraordinary monetary policy. It has never been more difficult to construct a portfolio because of the expense in the market.”
For the fund-of-funds manager, this backdrop has meant revamping his portfolio’s equity allocation.
At its peak, the fund’s exposure to shares came in well above 50 per cent; presently, it is just over 43 per cent.
Mr Conway said: “Today there is a much more alpha in the portfolio while our exposure to beta has never been so low.”
Much of this alpha has come from the investment trust universe, where the portfolio has more than 43 per cent of its assets invested.
Principally, he has focused on areas that he believes are sheltered from the wider economic environment.
Specialist property plays in particular have caught his attention. He highlighted Phoenix Spree Deutschland, which invests in residential properties in Berlin and secondary German cities.
Mr Conway said: “This fund is too niche to be affected by macroeconomic factors and Berlin is a city with a young population and the property is massively undervalued.”
The portfolio’s most recent addition has been Target Healthcare REIT, which boasts a dividend yield of 5.7 per cent.
“This is focused on high-quality, modern care homes that we expect to generate an attractive level of inflation-linked rental income for many years,” he added.
Another area that continues to offer some value for the manager is private equity, especially as the sector is trading on an average discount of 21 per cent.
He said: “The sector has been tainted by some very bad funds but I am at a loss as to why discounts are so wide – markets seem to forget that private equity plays a very important part in a capitalist society.”
A key holding for the fund is F&C Private Equity, which is trading on a 13.2 per cent discount, which Mr Conway put down to the 4.5 per cent dividend yield on offer.
Looking ahead and in the wake of the prolonged environment of ultra-loose monetary policy, Mr Conway remained “extremely cautious”. He said: “It is impossible to overstate the weird state the world is in. It would be dangerous to become institutionalised and get used to it. This has to end and that is what keeps us worried.”
Since the vehicle’s April 2012 launch, it returned 48 per cent versus an IA Mixed Investment 40-85% Shares sector average of 31 per cent, according to FE Analytics.
Against the market volatility of the past 12 months, it has managed to keep its head above water, returning 2 per cent against a peer group mean loss of 1 per cent.