InvestmentsMay 17 2021

Quilter fund boss sits on £1bn of cash due to bond woes

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Quilter fund boss sits on £1bn of cash due to bond woes

Paul Craig, who jointly runs the £8.8bn Cirilium multi-asset fund range for clients of Quilter, has allowed £1bn of cash to build up in the funds because he is reluctant to invest in bonds right now. 

The Cirilium fund range is a range of five multi-asset multi-manager funds that has been running for 13 years.

It has built up a £1bn cash pile, which Craig said, was in lieu of allocating to bonds.

He said: “In the more defensive portfolios in particular, the cash has built up instead of having a big allocation to bonds.

"We have fixed income expertise within the team that manages these funds, but, for example, the US 10 year government bond has lost about 6 per cent this year to date, and that is not a defensive asset. 

"With cash, you don’t really make anything, but you can’t lose much in the way you can with bonds.” 

He said he has persistently underestimated how low bond yields could go, and while yields have risen this year {rising yields means falling prices} he believes they may never go back to the previous levels. 

Tom Sparke, investment director at GDIM, a discretionary fund house in Cambridge, is another investor sceptical of allocating to bonds right now. 

He said: “It is a difficult time to own bonds, we saw in the inflation scare earlier this year that they can fail in their diversification duty when certain factors are present but there is little else available to deputise. 

"Alternatives, such as property, infrastructure or even cash, can provide some non-correlation with equity markets which will undoubtedly cushion a blow to stock markets but for inverse correlation outside of fixed income I think only the Targeted Absolute Return sector can provide."

He said many of the funds in the sector have provided protection on the downside but he was "not convinced" any one would reliably do this consistently.

He added: "It leaves us with bonds in portfolios that we may not believe will contribute much, if any positive return, but probably won’t do much damage either.  For a repeat of the move in yields we saw earlier in the year we would be looking at levels last seen when interest rates were many hundreds of points higher and this does not seem likely in the next 12 months.”

Move to open ended funds

Craig said the Cirilium fund range had “evolved every year” since it launched, and one of the ways this had happened was with increased exposure to open ended funds, and reduced exposure to investment trusts, to the point that 90 per cent of the capital today is in open-ended vehicles, compared with when the range launched when around 90 per cent was in investment trusts.  

Discussing the reasons for this shift in emphasis, he said: “There are some sectors where we have never owned open-ended funds, for example property, which is not suited to being in that structure.

"And when the fund range launched, we had £25m of assets and 90 per cent of it was investment trusts, but if you think back to 13 years ago, that was 2008, when the financial crisis was happening. And in that climate, many investment trusts were trading [at] discounts, they were a cracking opportunity, and were able to use gearing so got a lot of benefit in the recovery.

"And at that time the fees on investment trusts were considerably lower than those on open-ended funds, but in recent years the fees have come down so much that in many cases now the open-ended fund is cheaper.

"We have also reduced our exposure to investment trusts because the level of volatility in markets has increased, and this means the discounts at which trusts trade have become more volatile, and no one, no client likes volatility.”

As the fund range has grown in size, there is an increased capacity for Craig and his colleagues to provide seed capital for new fund launches by providers they like, and to have segregated mandates, both options which are likely to drive down costs. 

One example of this is the Granahan US Small and Mid Cap fund, which was launched specifically for clients of Cirilium, and is the only time the US firm has launched a fund for UK investors. 

Craig believes that a fund can be too large in size to be effective, but also too small. He says a fund needs to be profit-making for the provider, as if he invests in a fund he wants to know it will survive. 

He also feels that funds can get too large to be effective, and so one of the steps in the due diligence process for selecting a fund is to ask of the prospective managers what the capacity constraint on the fund is, that is, the point at which it would cease to perform well. 

david.thorpe@ft.com