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MPS Investment Committee: Barry Cowen, Sanlam Four

MPS Investment Committee: Barry Cowen, Sanlam Four

Barry Cowen, senior portfolio manager at Sanlam Four discusses managing risks, not returns.

'As part of our focus on helping clients achieve their goals as comfortably as possible, we try to see the world through their eyes. Often, they know little, if anything, about the complexities of the investment world, so there’s not much point in espousing a great Sortino ratio to calm any concerns.

But, as managers of risk-managed models, it is vital we move conversations with clients away from absolute (short-term) performance, towards risk-adjusted performance and, ultimately, outcomes. We manage portfolios accordingly, with risks rather than returns at the forefront of our decision making: we send our car for a regular service not for the mechanic to make it faster, but to ensure it gets us to our destination, reliably!  

The positive aspect of this is that successful risk management leads to successful performance, and ultimately to clients reaching their goals with maximum comfort. Yet risks come in many shapes and sizes: drawdown, tracking error, volatility, income shortfall, etc – and ‘greed’ means clients can be seduced by beta rather than alpha (or even beta dressed up as alpha), making appropriate risk management a major challenge.

We select and combine funds to produce great asymmetric outcomes, biased towards outperformance in down-markets, as drawdowns are perhaps most prescient to a private client.

Of the nine largest current UK fund holdings across our models, eight have outperformed on a (36-month) monthly basis in down-markets, by between 54% and 75%. But only four out of nine have outperformed in up-markets. Some have outperformed, to a lesser extent, in both up- and down-markets.

Our protective asset allocations have helped portfolios in the recent market turmoil – but mean that we could lag on the upside – without adjustment. So, what can we do to reduce the risk of under-participating in any recovery, while remaining cognisant that the market falls may extend further?

A UK-focused fund like Schroder Recovery, which outperforms 54% of the time in both up- and down-markets, gives that option. The global version of the fund provides an extra dimension, via a wider opportunity set.

So, we’re looking to move gently away from funds with more downside protection and less upside performance, towards Schroder’s global fund, which has a more ‘balanced’ performance, therefore increasing our portfolio asymmetry a little to the upside.

In bonds, we have benefited from being only marginally underweight gilts, despite negative real yields. We expected to see a tailwind from both a risk-off equity trade and falling UK inflation perspectives as the recovering pound worked into year-on-year numbers. Yields have fallen around 30 basis points from February 2018 highs. We reduced credit exposure throughout the second half of 2017, given tight spreads and a poorer risk-reward outlook.

Credit spreads have widened notably in some areas, as equity volatility (risk) has picked up. While mindful of the risks from inflation and a further risk-off in the equity markets, we can now book some profits in long gilts and harvest more attractive income in credit. 

With this in mind, we’re considering two additions: further building our position in the JPM Sterling Corporate Bond fund, which we have held since Andreas Michalitsianos took the helm in 2013, and which has outperformed the sector by around 5% over the period, and Twenty Four Dynamic Bond, to shorten duration further while increasing credit risk and yield as well.

Such gentle tactical management allows us to add and ‘compound basis points’ to long-term multi-asset beta, enhancing returns while also lowering risks. It usually means short-term second quartile performance but, over the longer-term, our clients outperform and sleep more comfortably at night.'

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