Important themes including long-term Asian growth, the value style over a growth bias and technological innovation are among the key areas of interest to long-term investors to focus on, according to Psigma Investment Managers’ Daniel Adams.
In the next of FE Trustnet’s series looking into how asset allocators would go about constructing a five-fund portfolio from scratch, senior investment analyst Adams said it is important to be well diversified.
However, the portfolio below has some flaws, including an underweight to the US and in particular the FAANGs (Facebook, Amazon.com, Apple, Netflix and Google parent Alphabet), although it is overweight broader technology.
It also leaves investors “only modestly exposed to fixed income assets, but we feel this is appropriate given where valuations currently trade, coupled with the medium-to-long-term outlook for the various markets,” Adams said.
Previously, Premier Asset Management’s Simon Evan-Cook undertook the challenge, which is aimed at giving investors new ideas, but also highlights the difficulty of constructing a small portfolio of funds for the longer term.
TwentyFour Strategic Income – 30 per cent
The largest allocation in this portfolio is to the £1.5bn TwentyFour Strategic Income fund, a “prudent” selection as it gives a “decent” weighting to fixed income assets and their defensive qualities, the analyst said.
“Fixed income markets have become a difficult place to invest in recent years, given the paltry yields and the perceived lack of protection they now offer,” Adams said.
“Nevertheless, in the TwentyFour Strategic Income fund, we believe we have identified an investment that takes advantage of one of the few remaining attractive opportunities in fixed income, without compromising the overall risk profile of the portfolio.”
The offshore fund, run by a team of six fund managers, has been a top quartile performer in the FO Fixed Interest Global sector since its launch, returning 12.27 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
The fund invests in short-dated debt, holding between 50-60 positions across the market spectrum, with an average credit rating of BBB (lowest investment grade rating).
“It has been specifically designed to reduce duration and interest rate risk, which is an increasingly dominant factor in the majority of fixed interest funds and provides a healthy income stream of 4 per cent per annum,” Adams said.
It has a clean ongoing charges figure (OCF) of 0.78 per cent.
Artemis Global Income – 20 per cent
Turning to equities, Adams first choice is the £4.3bn Artemis Global Income run by Jacob de Tusch-Lec since its launch in 2010.
The senior investment analyst said: “The fund is a diversified, unconstrained and thematically-concentrated global equity income fund, with a real total return focus.
“It targets a 4 per cent dividend yield, by focusing on quality companies with strong free cash flow generation and decent dividend growth prospects.”
Since its launch, the portfolio has returned 207.55 per cent, beating the IA Global Equity Income sector and MSCI AC World benchmark by 79.75 and 47.24 percentage points respectively.
Performance of fund vs sector since launch
Source: FE Analytics
“We particularly like this strategy as the manager has a reasonable amount of the flexibility to incorporate his macro view and change tack as the economic backdrop changes, which has proven to add value over time,” Adams added.
“The dividend stream helps supplement the general income scarcity across the fixed income universe and should add some more defensive characteristics to the equity portion of the portfolio.”
Artemis Global Income has a yield of 2.87 per cent and an OCF of 0.8 per cent.
River & Mercantile Global Recovery – 20 per cent
Sticking with global equity funds, Adams said that value portfolio R&M Global Recovery gives a different option for investors.
Headed up by Hugh Sergeant, the fund is very underweight the US, reflecting the manager’s value stance and has around one-third allocated to emerging markets.
“We believe that having an allocation emerging markets is imperative within a balanced portfolio, given the attractive long-term growth dynamic of the underlying regions, coupled with the inexpensive valuations,” Adams said.
Since its launch in 2013, the £469m portfolio has returned 120.37, outperforming the average IA Global peer and MSCI AC World benchmark despite the value style underperforming over the period.
“Equity markets have performed very strongly in recent years, but the disconnect now between value and growth is as wide as it has been in recent history – since 1999,” he noted.
“Of late, the US has become extremely ‘en vogue’, while some regions, such as Europe and Japan, have materially lagged and now offer great long term catch-up potential. At the current juncture, we believe that value looks cheap in isolation and relative to the wider market.”
The fund has an OCF of 1.17 per cent.
RWC Nissay Japan – 10 per cent
Sticking with the undervalued theme, Adams said that having a dedicated exposure to Japan may not be a bad idea for investors, hence the 10 per cent weighting to the five FE Crown-rated RWC Nissay Japan.
“We believe that Japanese equities look cheap on a relative and absolute basis and should form a central part of any portfolio,” Psgima’s senior investment manager said.
“Investors have yet to fully appreciate the change that is taking place within many Japanese corporates, with a refreshing focus on shareholder returns.
“This new discipline from certain companies should be very rewarding for investors in those companies, as dividend and share buybacks increase and management look to better manage their inefficient balance sheets.”
The RWC Nissay Japan Focus fund is positioned to exploit this trend of improving corporate governance, which is the fund’s principal focus currently.
Manager Yasuaki Kinoshita invests in companies that he sees as offering short term value and long-term restructuring potential.
Since its launch in 2015 the portfolio has been the third-best performer in the IA Japan sector, returning 78.71 per cent, as the below chart shows.
Performance of fund vs sector since launch
Source: FE Analytics
Adams added that the highly concentrated is encouraging as it allows the manager a “deep dive” into each company’s internal dynamics and the identification of specific catalysts to realise a re-rating.
“Although we would recommend an allocation to the fund, given the nature of the theme – quasi-special situation – and its concentrated approach, a smaller weighting is recommended,” he noted.
The fund has an OCF of 1.25 per cent.
RobecoSAM Smart Materials – 20 per cent
With value incorporated into the portfolio, Adams said the five crown-rated RobecoSAM Smart Materials fund gives investors a more thematic way of investing that should capitalise on technological advancement.
“We believe that the addition of the fund will provide an important tech dynamic to the overall portfolio,” he said.
At its core, the fund is about investing in solutions to resource scarcity, looking to invest in disruptive technologies and innovative materials, which are expected to become mainstream over time.
“Given the high growth trajectory of many of these companies, they tend to trade at a significant premium to the broader market, with little margin for error,” Adams said.
“However, after the recent dislocation in commodity and equity markets, we feel that valuations have come back sufficiently to provide an attractive entry opportunity into an exciting high growth and continuously evolving market.”
While it may give the portfolio an optically high allocation to basic materials, much of this is skewed by innovative materials (such as lithium, lightweight materials, speciality metals etc), rather than the conventional bulk materials that one might instinctively associate with the asset class.
Since its launch in 2008, the fund has returned 106.83 per cent to investors, just behind the MSCI World’s 115.68 per cent. It has an OCF of 1.2 per cent.