While most investors will continue to pay fees while a fund goes through a period of underperformance, FE Alpha Manager Alec Cutler is returning money to his own backers as his fund has struggled to outperform more recently.
So far in 2018 Cutler’s five FE Crown-rated Orbis Global Balanced fund has underperformed the composite 60/40 MSCI World/JPM GBI Global benchmark’s 6.57 per cent gain, having returned just 2.49 per cent.
It has also underperformed the IA Mixed Investment 40-85% Shares sector average, which is up by 2.61 per cent.
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
The Orbis Global Balanced fund does not levy an annual management charge but carries a performance fee of 50 per cent of the return over its composite benchmark paid into a reserve, from which the asset manager draws periodically.
However, the performance fee is refundable at the same rate in the event of underperformance relative to its benchmark, which is the situation it currently finds itself in.
The £34.7m multi-asset fund’s tailing 12-month performance gross of fees is 6.6 per cent, while the composite benchmark’s return is 6.5 per cent, yet the net of fee figure stands at 6.5 per cent.
Cutler (pictured) explained: “We take half out of the outperformance and give back half of the underperformance; that’s been a mirror image [split] over the past 12 months and we [therefore] wind up flat.
“There aren’t many funds that outperform the benchmark over a one-year period and don’t take a fee at all.”
The FE Alpha Manager said since the launch of the fund in January 2014 a fee of 2.7 per cent has been charged, adding: “I think relative to peers [that] is quite inexpensive.”
He said: “That is the all-in fee that the fund has charged while putting up outperformance of the peer group of 4.5 per cent per annum. That is the value proposition we’re trying to put forward.”
Much of the criticism over the fund’s performance fee structure has surrounded its 50 per cent of the take over the benchmark’s return, said Cutler.
“How can you take 50 per cent? The answer is we don’t take any base fee and we pay the admin and custody charges,” he explained.
“When we came out with the fee [structure] there were a lot of questions about ‘will this ever really benefit clients’? And I think there’s always suspicion of fee structures that are new and novel,” said Cutler.
“We’ve been waiting for a patch of underperformance so that we can demonstrate in real time actually how it works and benefits clients through a smoother return.”
The Orbis Global Balanced fund aims to balance income generation, capital growth and the risk of loss through investment in a range of asset classes but has struggled more recently.
“Underperformance or outperformance often comes from underperformance or outperformance of a quiet period: it doesn’t go in a straight line,” said Cutler.
“You get these swings and roundabouts: 2016/17 was very strong, so to underperform a little bit [now] doesn’t seem to be out of line. In that regard there’s not really much to point to, there’s not a single collapse in a name.”
Performance of fund vs sector & benchmark since launch to end-2017
Source: FE Analytics
Cutler said the much of the underperformance could be traced back to its underweight position in US equities, which had helped in the 2015-2017 period.
“The US has been driven by a narrow group of highly successful growth names, some of which we own,” said the Orbis manager.
“We really haven’t changed much [else] in the last quarter, we are effectively at parity with the nominal risk level in the benchmark so 60 per cent equities – net of hedging – and the fixed income part has come up quite a bit thus far this year.”
The increase in the Orbis Global Balanced fund’s fixed income allocation has come largely from the addition of one-year US Treasuries where he said yields have risen from zero to 2.5 per cent over the past 18 months.
“We think that right now where we are in the investment and economic cycle and the level of insurgency in the world combined with valuations a 2.5 per cent guaranteed return with unlimited liquidity is pretty attractive,” he said. “That balances off against some higher yielding fixed income that we’ve added in names we have a high degree of confidence in.”
While the start of the year has proved more challenging for the strategy, Cutler remains optimistic about the remainder of 2018, highlighting the return of volatility to markets after a relatively stable 2017.
“Right now, we’re seeing a lot of volatility on a name-by-name basis and investors seem to be fairly trigger happy right now,” said the manager.
“We’re having fantastic opportunities in things like Pacific Gas & Electric, which is going through tumult over wild fire liabilities in California.
“Bayer – which acquired Monsanto – and have just experienced a rather ludicrous ruling in a Californian court awarding a gentleman $289m [following a case involving alleged links between weedkiller and cancer] that’s knocked $14bn of the market value.”
He added: “There are some pretty wild results out there on a short-term basis have allowed us to take advantage of having that highly liquid Treasury position to be able to make sure quick moves in to irrational share price movement.”
However, the manager said he would not be surprised if extraordinary activity in markets continue, particularly given the rise of populism – creating geopolitical challenges – and activism.
“Investors are anxious on a name-by-name basis while being complacent on an overall market basis, Cutler explained. “That’s a recipe for these very volatile short-term moves.
“If you have people coming in and talking about how machines are going to take over the investing world it’ll be interesting to see how [those] machines deal with crazy court rulings or irrational legislators in say California.”
The largest individual positions in the overall £3.2bn Orbis Global Balanced strategy include oil giants BP and Royal Dutch Shell, pharmaceutical companies AbbVie and Bristol-Myers Squibb and an allocation to ETFS Physical Gold.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the retail fund has delivered a total return of 55.81 per cent compared with a 46.64 per cent gain for a composite 60/40 MSCI World/JPM GBI Global benchmark, and a return of 26.32 per cent for the average IA Mixed Investment Shares sector fund.