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The latest episode of the Asset Allocator Podcast is out now. Justin Onuekwusi, head of retail investments at Legal & General Investment Management, joins us to talk about using passives and the dangers of concentration risk. To listen find us on Spotify, Acast, Apple Podcasts and most other podcast platforms.
A different Gear?
The rotation in markets over the past year has allowed several funds to deliver strong performance after years in the doldrums and some allocators to ponder whether it’s time to dip their toes back into funds they had previously ignored.
The risk at this stage, of course, is that market sentiment shifts and rate rises and inflation are viewed as the prelude to a period of economic slowdown. This will hurt the sort of economically sensitive stocks that typically make up "value" funds.
Given the unusual nature of the Covid recession and recovery, timing the market cycle right now may be harder than it has ever been.
But the other challenge for allocators is that the decade-long growth rally created something of a wasteland in the value. Some established managers who favoured value investing exited the industry, and others saw their once pristine performance records addled by years of poor returns. In some cases entire fund houses fell victim, such as value specialist Sanditon.
Another victim was the Systematic Equity team at Jupiter, formerly of Merian and co-led by Ian Heslop. Five years ago the team’s flagship Global Equity Absolute Return mandate had assets of more than £6bn but that has shrunk to some £1bn now.
The fund deploys a range of factors when selecting stocks, one of which is value. So unsurprisingly 2021 was a strong year, with the fund returning 18 per cent compared with 3 per cent for the IA Global average.
But that followed three years in which the fund lost money in absolute terms and fund buyers headed to the exit, with the last of the DFMs on our database selling the fund in 2019. Another fund buyer, Darius McDermott, who advises the Chelsea Multi-Manager fund range, sold in 2020.
It is a similar tale for the team’s US equity mandate, with a handful of allocators exiting within the past three years - though this fund is held by two of the DFMs on our database.
Which brings us back to the human factor. Value may be back but Heslop confirmed last week he was stepping away from day-to-day fund management and moving to an advisory role. That leaves his long-time collaborator and co-head of the team, Amadeo Alentorn, in sole charge in a move being labelled as business as usual.
With the fund having strongly outperformed over the past decade, things have been looking up more recently.
Fund buyers contemplating dipping their toes back into the water after a strong 12 months will be watching to see how the new arrangement plays out.
For all the talk of economic recovery boosting markets, 2021 was actually a below average year for client returns.
Data from Asset Risk Consultants, compiled after examining the returns of DFMs accounting for about £1.5tn of assets, found clients in the ARC Steady Growth Portfolio, a risk profile which is most common among the managers examined, gained 10.2 per cent in 2021.
This is below the long-run average annual return for such a portfolio, which is 13.5 per cent.
Volatility was lower than average though, with the biggest peak to trough fall being 3.5 per cent, the lowest since ARC began to gather the data in 2004.
The data also showed a sharp divergence between the best and worst performing DFMs, with the top quartile of managers in the Steady Growth segment delivering on average 2.5 per cent more in 2021 than those in bottom quartile.
The portfolio in question would typically have around two thirds in equities, and the rest in bonds and cash.
James Sullivan, partnerships manager at Tyndall Investment Management, was wary of the outlook for bonds in the current environment of quantitative tightening, but said "there is no alternative" since many other diversifiers tended to have equity-like levels of volatility, so did not do the job of bonds
After a period where funds that could, however loosely, be grouped together as ESG mandates performed strongly, and providers tripped over each other in their haste to bring such products to market, the return of inflation and value has led to underperformance this year.
Patrick Thomas, who heads up the ESG investment team at Canaccord Genuity, believes he may have the answer with the Keystone Positive Change investment trust.
That vehicle used to be run as a UK equity mandate at Invesco, before switching to Baillie Gifford in December 2020 where its strategy was changed to global growth and ESG.
The team now running the trust have also been managing the Baillie Gifford Positive Change open-ended fund for several years.
While the investment trust has been a bit of a stinker over the past five years - losing 12.7 per cent - the open-ended fund has returned 193.6 per cent over the same time period.
Thomas says the trust’s management team have, in their open-ended fund, delivered better performance than anyone else over the past five years across any sector. Indeed the open-ended fund is the second-best performer in the IA Global sector over five years.
Like many growth style funds, neither Positive Change fund has had the best time of late - the open-ended fund is down nearly 24 per cent over the past three months, with the trust’s shares struggling even more.
But Thomas’s belief is that in the long-term the management team will prove to be no Keystone cops and will be able to turn the trust from an ugly duckling into a swan.