Woodford Income Focus
Neil Woodford’s recent misfortune has been covered extensively. If he wants to change the direction of the flows to his fund, he can’t afford another year of underperformance. Relative to his UK equity income peers, Woodford has already reached his longest period of underperformance.
Neil Woodford’s fortunes could change quickly as he has not hesitated to take contrarian bets. He is one of the few fund managers to openly admit that he sees Brexit as a buying opportunity. For instance, he has been building stakes in UK banks, retailers and housebuilders.
Neil Woodford’s 1yr excess return over peer group composite
Source: FE Analytics
Woodford has also backed his stock-picking, despite poor performance. He has retained such names as Provident Financial, Astrazeneca and Prothena, even after recent attacks from short sellers.
Investors tend to expect managers to acknowledge losses when they make losses, instead of falling in value traps – next year Woodford will have to prove that he has not fallen prey to these misconceptions.
Jupiter Absolute Return
James Clunie took over the reins of Jupiter Absolute Return in 2013, bringing his short-selling experience to the asset management company.
To return positive performance, Clunie aims to exploit inefficiencies in global equity markets. This means he prefers a more volatile environment, as rising then falling markets should help both sources of alpha (the long and the short book) to generate positive return.
Higher volatility also means a greater number of opportunities to take advantage of, as the behaviour of investors is often irrational.
Performance of funds vs sector under Clunie
Source: FE Analytics
Despite the low-volatility environment, Clunie has managed to limit losses this year to 2.98 per cent (as of 5 December 2017) by cutting the fund’s gross and net exposures. This also highlights Clunie’s strong understanding of his investment process and the macro environment.
Nevertheless, unit holders will expect a stronger upturn in performance if 2018 brings volatility back on global equity markets.
Allianz Strategic Bond
It was a difficult year for the recently appointed Mike Riddell. We believe recent performance does not fully reflect the changes that he has made since taking control in November 2015.
Riddell aims for a “genuinely strategic” portfolio, by which he means a fund with a low correlation to global equities and which moves strategically between different parts of the bond market depending on where the opportunities lie. He adopts a broad global bond index as his benchmark and aims to outperform it by allocating equal amounts of his bets to interest rate positioning, corporate debt, currency positions and inflation positions.
Allianz Strategic Bond’s tracking error vs sector
Source: FE Analytics
The even split between rates, credit, inflation and currency is attractive: most strategic bond managers are essentially managing credit plus interest rate duration.
We believe this fund is interesting as it shouldn’t behave like most strategic bond funds, as highlighted by the current tracking error of 2.5 per cent relative to the sector. If credit outperforms again, we should see Riddell’s bet to diversify the alpha generation disappoint investors again.