David Coombs has overhauled the alternatives exposure in his £196m Total Return Portfolio, deciding to back hedge funds at the expense of a Kames long/short strategy.
The Rathbones multi-asset head has dropped the £474m Kames UK Equity Absolute Return fund, managed by David Griffiths, David Pringle and Malcolm McPartlin, instead favouring commodity trading advisers (CTAs) and the BH Macro hedge-fund trust.
The vehicle has about 19 per cent allocated to alternatives, split between commodities, hedge funds and CTAs – a type of long/short fund that primarily invests using futures and market neutral strategies. The latter group is now solely represented by a 4.8 per cent allocation to the Henderson UK Absolute Return fund.
“Our view is that in the hedge-fund space ought to be doing well post-Brexit, where we’re seeing a divergence in central bank policy and more volatility in currency and rates,” Mr Coombs said.
“In a world where equity markets are fair value and bond markets expensive, you want people to make asymmetric returns.”
The Kames fund has struggled of late, losing 3.5 per cent over one year and only returning 2 per cent across three years, whereas the BH Macro investment trust is up 7 per cent.
The Rathbones fund – which aims to return 2 per cent above 6 Month Libor – underwent the changes after Mr Coombs shifted equity exposure in order to take more risk.
Recent asset allocation has meant cash makes up almost 28 per cent of the portfolio due to the manager’s bearish stance on bonds. The fixed income products that are held have limited duration, of roughly three years.
“The strategies we don’t like are bricks and mortar or fixed income, and of the major asset classes it doesn’t leave you a lot. If we want to generate returns this year we’ve got to take risk somewhere,” Mr Coombs said.
As a result the vehicle has built up positions in four specialist equity funds – three of which are investment trusts. These included The Biotech Growth Trust, Martin Currie Asia Unconstrained, and private equity strategy HgCapital Trust. An open-ended Japanese equity fund from Michinori was also added.
“We decided to increase our risk in equity because we had so little risk in fixed income, particularly as we wanted more overseas exposure and growth exposure,” he explained.
“We saw decent discounts on the trusts and wanted to take more risk in equities.”
The manager said his major focus in the coming months would be on currency. He currently hedges away all euro exposure and half of his US dollar exposure.
He believes sterling will remain at its level or weaken considerably more, given his expectation that even with a larger majority after the general election, prime minister Theresa May would still pursue a hard Brexit.
Mr Coombs also described the euro as “structurally challenged” and expects the currency to weaken. “We’re really concerned about currency,” he said.