Premier’s Rees turns to niche funds amid volailtity

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Premier’s Rees turns to niche funds amid volailtity

The managers of Premier’s Multi-Asset Absolute Return fund have more than doubled their cash weighting from pre-Brexit levels and turned to several niche portfolios in a bid to weather market volatility.

Ian Rees, Premier’s head of multi-asset research and a manager on the £129m fund, which invests in a variety of alternative and specialist products, said recent market gyrations had led to the team taking a more cautious outlook.

Cash levels rose significantly in June, from around 5 per cent before the EU referendum to 9 per cent, following the downsizing of certain positions.

“We have a position in Allianz Merger Arbitrage,” Mr Rees said. “When there’s increased market volatility you see a rise in merger and acquisition deal failure because stock prices move. Near term, this would result in a headwind for the strategy, which harvests merger premium on announced deals. If deals do not complete, there is no premium to harvest and the retracement of share prices may create a loss.

“We reduced our holding considerably and trimmed Jupiter Absolute Return and BlackRock European Absolute Alpha.”

The team then allowed cash levels to rise further, to around 12 per cent in early July, on the back of inflows, with Mr Rees stating some portfolio ballast was necessary amid recent market swings.

“It was a conscious decision, post-Brexit, to raise cash in the portfolio,” he said. “It provides a buffer for stability in continued market volatility and gives us that flexible optionality.

“Given the buoyancy of markets alongside fragility of sentiment, I am anticipating keeping cash to use on compelling investment ideas that may present themselves in an environment of likely volatility and uncertainty. In other words, staying cautious.”

This, however, has not prevented the team from seeking other opportunities, as they turn to more idiosyncratic strategies which they believe could capitalise on market divergence.

In recent weeks, they have invested in the KLS Zebra Global Equity Beta Neutral fund, using cash, and the recently launched Kames Global the recently launched Equity Market Neutral offering.

The latter was funded by reducing exposure to firm’s UK Equity Absolute Return.

“There’s now more dispersion between sectors and stocks. That’s an opportunity for long/short managers to exploit,” Mr Rees explained. “Our investment in the KLS fund chimes with our liking of overlooked companies that are either illiquid or smaller cap positions. It’s the premium of good companies that are overlooked.

“We also added Kames Global Equity Market Neutral. The firm has had success with its long/short strategies and has a good, established process. We were keen to back that at launch.”

The managers have also added to existing holdings in the fixed income space, including TwentyFour Asset Management’s Monument Bond fund and Axa WF Global Inflation Bonds.

“We have had that holding for six to nine months and it hasn’t done anything for us, but it’s there for an inflation hedge,” Mr Rees said of the latter.

The team has also been using zero-dividend preference shares – zero-coupon securities often issued by closed-ended vehicles, which have set maturities and are backed by assets – from Bermuda-based investment company UIL, and switched from a 2016 issue to a 2022 issue. Mr Rees said the shares provided a “low-risk” way to invest in UIL’s assets, which include financial services and infrastructure.

“You are on a fixed life and you are getting your capital entitlement,” he added. “That’s useful in an absolute return fund, when you have a bit more stability.”

He noted assets in UIL would need to fall 34 per cent to prevent investors from getting their capital entitlement at maturity in October 2022.

Key Numbers

7pp

Rise in fund’s cash weighting following Brexit result

4.2%

Allocation to fund’s largest single holding, Polar Global Convertibles