Barry Cowen, senior portfolio manager at Sanlam FOUR, discusses making the move from equities to alternatives.
'Sanlam’s Fund Solutions team collectively runs over £4.5 billion in assets, of which £800 million is linked to our Model Portfolio Service (MPS).
Our model suite benefits from both top-down and bottom-up inputs. The asset allocation committee discusses and sets relative positioning against the long-term composite benchmarks. The fund selection committee chooses the best, most appropriate component products, and the portfolio managers work to effectively bring the two together, in a holistic way. This ensures the portfolio sub-sectors reflect the desired positioning across asset class and factor combinations. Views are implemented by adjusting asset and fund weights accordingly, but also outsourcing to some strategic and some tactical managers.
We use a blending approach to optimise outcomes. Academic data supports ‘value’ and ‘market cap’ as key long-term performance drivers, but ‘quality’ and ‘growth’ can combine with these core factors to provide better long-term risk-adjusted outcomes. Our key focus is helping clients achieve their financial goals as comfortably as possible. Drawdown risks are as important a consideration as volatility, a statistic that most private clients may barely feel.
With inflation an apparently increasing risk, we have been seeking to raise protection against the threat of higher bond/equity correlations.
We have been steadily improving the credit quality of our holdings, while maintaining an underweight to duration.
For example, we recently reduced the Jupiter Strategic Bond fund (over 50% sub-investment grade or unrated) to implement this asset allocation committee view.
To retain the duration underweight we increased exposure to the M&G Short Dated Corporate Bond fund and a duration of less than two years. The M&G position is aided further by 26.9% in floating rate notes, benefiting from higher short-term rates. This interest rate ‘barbell’ has served us well in recent weeks.
Currently, we are looking to reduce some of our positions in favour of defensive recovery plays. A name like BT, held by Alex Wright’s Fidelity Special Situations, has been caught in the spotlight with the regulator pressuring the company over Openreach, and fraud in its Italian division.
Yet as a ‘utility’ with some inflation-linked pricing ability, and a pension fund that may see its deficit shrink with higher rates, it does have some positive attributes. Rather than time the purchase decision in such names we are increasing exposure to funds like Wright’s that have proved good at managing that decision.
Similarly, in Europe, we replaced BlackRock Continental European Income with BlackRock European Dynamic.
The income fund successfully played the ‘arbitrage’ between low bond yields and more attractive equity dividend yields. However, rising rates in Europe may negatively impact ‘income stocks’. The latter fund’s top-down view is not hugely different (low bond rates/low inflation) but the approach is, and its more flexible style can seize opportunities should the backdrop change.
The slow move from equities to alternatives has been considered and managed, emphasising our long-term approach to investing.
The growing level of caution and diversification has served us well in early 2018. On a volatility adjusted basis to the end of February 2018, the models significantly outperformed their benchmarks and our Sharpe ratio’s for the previous five years to this date range from 1.16 to 1.28 across the model suite. Drawdowns have also been lower than benchmark, with, we expect, more benefits to come as the cycle turns.'