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Thomas Miller ditches passives for active mid caps

Thomas Miller ditches passives for active mid caps

The investment team at Thomas Miller Investments has divested some of its large-cap passive fund holdings in its Model Portfolio range, in favour of a concerted shift towards active mid-cap managers.

The team has called a low in sterling and believes the outlook for the UK’s domestic economy is becoming more favourable.

Mid-cap FTSE 250 stocks have underperformed FTSE 100 counterparts this year, mostly as a result of sterling weakness boosting larger international earners in the main index. But sterling has begun to level out, with UK growth expectations increasing after taking a plunge post-Brexit referendum.

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Jordan Sriharan, senior investment analyst on the range, said it was this perceived turning point that prompted the move out of large-cap passives, such as Fidelity’s and Legal & General Investment Management’s FTSE 100 products.

The range rotated into mid-cap, actively managed funds such as the Threadneedle UK Income, Artemis Income, and Neptune UK Mid-Cap vehicles last month.

Mr Sriharan said the move reflected the view that “perhaps sterling won’t fall as much going forward”. He added that the domestic economy “isn’t as weak as [had been] suggested” following the UK’s vote to leave the EU.

“The immediate sentiment seems to be broadly positive and that should provide a better environment for those domestic mid-cap FTSE 250 companies.”

Sterling weakness, however, has been one of the biggest drivers of performance in the range in 2016, for both equity and fixed income holdings. The team moved its bond allocations into an unhedged US credit fund, the iShares US Dollar Corporate Bond vehicle, after the pound first started falling in early 2016.

“While we weren’t sure that sterling would meaningfully appreciate or depreciate, the inherent volatility meant that maybe by being unhedged we could generate some returns on a medium-term time horizon,” Mr Sriharan said.

Over the past month, amid signs that sterling had neared its lows and that it was time to move back to a more “benchmark” view, the range rotated back into a hedged share class, via the UBS US Corporate Bond fund.

“[At the start of 2016] we took an off-benchmark risk as we assumed sterling weakness. But as the currency has fallen a significant amount, we’re moving back in line with our long-term asset allocation,” the manager said.

“It’s a prudent thing to do because we generated a level of return from being unhedged. That’s a very simple currency play, but we come back to being hedged in our fixed income portfolio.”

There was also a rotation from longer duration plays, such as the iShares US Treasury fund with a 20-year duration, to shorter-dated funds like the iShares UK Gilts fund (which has a duration of less than five years) and Standard Life’s Short Duration Global Index Linked Bond fund. 

Duration has become an important play in 2016, with investors and asset managers favouring short-duration bond funds as the risk-return pay-off in long-dated debt waivers.