Steven Rooke, portfolio manager at Cazenove Capital, discusses how blending manager styles helps ride out tricky markets.
'Our investment strategy is driven by our views on the economic/capital market cycle which helps filter our investment universe. Our research focuses on managers we would expect to have the strongest tailwinds in the environment we foresee. This could be a positive bias towards a certain style or market cap; cyclical or defensive assets; high or low beta; or a top-down or bottom-up approach to investment.
An example would be adding to a value strategy during the early stages of a stock market cycle where investment focus tends to be on valuation, and as the cycle progresses fundamentals such as earnings matter increasingly more, which can benefit growth strategies.
When using active funds we will often look to blend manager styles to help reduce volatility. For instance, here in the UK we combine the Old Mutual UK Alpha fund with the Troy Trojan Income fund.
Richard Buxton, who runs the Old Mutual fund, remains positive on UK equities and has typically displayed a higher beta than the market. While Francis Brooke at Troy is more cautiously positioned, focusing on high quality multinational companies.
Both funds have fantastic long-term track records, but have achieved these returns in different ways.
Owning both therefore helps increase diversification with the aim of reducing volatility and smoothing out returns.
As at 31 December 2017, the Cazenove Capital MPS Balanced model (risk rated DT4) has 48.1% in equities, 21.4% in bonds, 23.3% in alternatives and 7.3% in cash.
Within equities, we have a bias overseas, with recent moves to add to both the US ahead of the proposed tax reforms, and Japan. Valuations there look attractive relative to other equity markets while the Bank of Japan continues its policy of quantitative easing.
We remain bearish on bonds in general, deliberately keeping the allocation here low, accessing via a mixture of passives, such as index linked gilts and US Tips, and active, for instance M&G Optimal Income and Schroder Strategic Credit.
Our preference within alternatives has been for long/short targeted absolute return funds such as Janus Henderson UK Absolute Return, property via TR Property Investment Trust, and income diversification from the Architas Diversified Real Assets fund.
Since its launch in July 2016, the performance of the Cazenove Capital MPS Balanced model (DT4) up to the end of December 2017 is +16.9%, with the Cazenove Capital MPS Growth model (DT5) up 21.7%. The one year numbers up to the end of December are MPS Balanced (DT 4) +8.1% and MPS Growth (DT 5) +9.9%.
Cazenove Capital launched the Model Portfolio Service (MPS) at the start of July 2016 as an extension to our bespoke discretionary service available to IFAs. Our models are currently available on the Standard Life, Novia, James Hay, Fusion and Aegon platforms, with rapid expansion onto other platforms over the coming months.
The MPS models follow the same multi-asset approach that has served Cazenove Capital’s clients so successfully over time – combining traditional asset classes such as equities, bonds and property, with targeted absolute return funds, infrastructure and commodities, with the aim of delivering strong risk-adjusted returns. The models use open-ended funds, ETFs and investment trusts, with a mixture of both active and passive funds.'