Absolute Return  

Best in Class: Cautious but capable offering

Best in Class: Cautious but capable offering

One of the industry blogs I read regularly is ‘Iggo’s Insights’, by Axa IM fixed income chief investment officer Chris Iggo. 

Barring the final paragraph, which tends to focus on a football team I’d prefer not mention, it’s one of the most interesting views on bonds around.

As well as explaining the intricacies of the asset class, it’s full of little factoids – one of the most recent being that years ending in ‘7’ haven’t exactly been lucky ones in financial markets. We had the stockmarket crash of October 1987, the Asian financial crisis in 1997 and the beginnings of the global financial crisis in 2007 with the run on Northern Rock.

However, despite any number of headwinds going into 2017, so far so good (feel free to touch wood at this point). With the exception of Treasuries, Russian equities, US real estate investment trusts and commodities, every asset class is in positive territory. Even tensions in North Korea haven’t been enough to knock markets off course... yet.

But at the risk of sounding like a broken record, valuations are a concern. Pretty much every asset class is fair value or expensive and I really have to question how long markets can continue their upward climb. It’s time to be prudent. Taking steps to ensure there is sufficient downside protection in a client portfolio could turn out to be a wise decision.

A fund worth a look at in this respect is Brooks Macdonald Defensive Capital. Long-term capital growth and protection is the name of the game for this defensive, multi-asset strategy. 

Beginning life as a vehicle used solely by Brooks Macdonald for its clients’ own money, it aims to deliver positive absolute returns over rolling three-year periods, in a range of market conditions, with less volatility than equity funds. The product has strongly outperformed its peers since its 2006 launch.

Brooks Macdonald co-founder Jon Gumpel has run this fund from launch. He is assisted by Niall O'Connor and Robin Eggar and their philosophy is that life is all about calculated risks. They prefer tortoises to hares, but are happy to take risk where it is already priced in, or where capital is protected. 

The pair seek to create a portfolio whose performance is “predictable” by investing in assets that have fixed returns. 

While the types of assets that this fund holds can be a bit complicated and difficult to explain to clients – convertible bonds, preference shares, structured notes, bond and loan assets, and discounted assets – the goal of delivering positive total returns, even when the market falls, is straightforward enough and it does not have a performance fee. 

There are a few caveats: due to the nature of the vehicle it is likely to underperform in strongly rising markets and, as with all absolute return funds, the positive returns are a target not a guarantee. The value can still fall, as it did in 2008. During its lifetime, the portfolio’s volatility has also been higher than other absolute return and mixed-asset funds.