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‘Active managers will earn their fees’: Inside SG Wealth's investments

Despite selling out of Standard Life Gars in 2016, chief investment officer Henry Gaskin says SG Wealth Management still favours absolute return funds as part of its active-only approach

‘Active managers will earn their fees’: Inside SG Wealth's investments

Despite selling out of Standard Life Gars in 2016, chief investment officer Henry Gaskin says SG Wealth Management still favours absolute return funds as part of its active-only approach.

SG Wealth Management, which only uses active funds, is one of the IFAs that sold out of Standard Life Aberdeen’s Global Absolute Return Strategies (Gars) in 2016. But the East Anglia-based advice firm has kept faith in absolute return funds.

Henry Gaskin (pictured), SG Wealth’s chief investment officer, says the firm had a 5% weighting in Gars across all its major portfolios in 2016. It held this for a number of years, but decided to sell out later that year.

‘We were concerned that a combination of fund size and team change had the scope to make the strategy more unwieldy, and poor performance during 2015 focused the mind,’ Gaskin says. ‘We started reducing our position in early 2016 and moved out wholly in the autumn that year, rotating into a blend of higher and lower volatility uncorrelated funds.’

Gaskin says the firm still stuck by absolute return funds, or uncorrelated strategies. It replaced Gars with the Invesco Perpetual Global Targeted Returns fund and Royal London’s Short Duration Global High Yield Bond fund.

Gaskin says at the moment the firm’s model portfolios, which are discretionary managed, are overweight in absolute return funds. 22% of its medium-risk portfolios are in this sector compared with their normal weighting of 10%-15%.

He acknowledges the returns of some of the big absolute return funds have ‘not been great’, but says their inclusion has been important in diversifying portfolios.

The firm is also underweight traditional fixed interest. But as interest rates go up and monetary policy begins to ‘normalise’, Gaskin says the firm might start increasing its fixed interest positions, cutting down absolute return weightings to do this.

‘One of the reasons we have been overweight targeted return is we have been strategically underweight in fixed interest, compared with our traditional portfolios, for some time,’ he says.

‘But that is something we may change. As bond yields move up we will maybe revisit some of the targeted return strategies and look to include some exposure to more traditional fixed interest assets at some stage.’

Prime example

SG Wealth is a believer in active management and, although it would never rule passive out, Gaskin’s philosophy is that good active management will add value over time, despite its costs giving passives a ‘head start’.

‘With easy market conditions, which we have had for some time, the passive argument is stronger. But as we move into more challenging conditions, those active fees are going to be probably be well-earned by the better managers out there,’ he says.

When explaining to clients why the firm uses active funds, one of the examples it picks out is the Liontrust Special Situations fund. This is run by two Citywire AAA-rated managers, Julian Fosh and Anthony Cross.

The managers look for companies with intellectual property, strong distribution channels and significant recurring business. Consumer goods company Unilever and pharmaceutical giant GlaxoSmithKline fit this bill and the fund has a 4% stake in each.

The UK equity fund, which has a small and mid-cap bias, has returned 71.6% over the past five years, compared with its benchmark, the FTSE All Share, which returned 43.5% (see graph below).

‘It is a fund I would urge most people to look at for their portfolios,’ says Gaskin. ‘We use it in presentations to clients, in the passive versus active argument, to demonstrate the value of good active fund management.

‘In up-and-down markets it tends to do very well, so we use it as an example of how a fund can add value over the benchmark. I think every year over the past 10 years it has outperformed its benchmark and most of its peers.’

SG Wealth has its own discretionary permissions and tends to like funds that have at least £75 million in them. It tends not to back ‘fledgling’ funds.

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