'We are drawn to funds run by managers who are naturally inquisitive and enjoy the process of applying their own investment philosophy to identify investment ideas.
Ideally the manager should be able to display a long, successful track record of utilising the current investment philosophy/process, unhindered by the fund house’s view.
One such example of an outstanding manager, in our growth MPS, who has his own unique investment philosophy and has produced peer group beating returns is Hideo Shiozumi (pictured) at Legg Mason Japan fund. His fund has produced a three-year return, up to the end of March 2018, of 147.05% with the next best fund returning a paltry 66.67%.
The average Japanese fund has produced a return of 41% over the same period.
When we add a new fund to our MPS we aim to back the manager over a long potential holding period. It is not our view that we need to be overly active in making fund switches based on short term noise and performance. Unless our belief in the manager’s investment philosophy and process has become less convincing we intend to back them through tough times as well as good.
Although not hardwired into our fund selection process, a high active share is one of our soft criteria that we would prefer to see. It is our view that in order to beat any benchmark one has to be different to it. The higher the active share the greater the difference between portfolio and underlying benchmark and the greater the chance of outperforming.
Smaller funds tend to exhibit higher active shares as they are less constrained by liquidity and less likely to be closet index trackers.
We take advantage of our smaller scale and use it to gain access to the strategies with the best chances of beating the benchmark.
Protection on the downside
While we are not currently trying to un-correlate ourselves from the current decade long bull-run, we always keep one eye on the future and times when markets may be far more challenging. Even the top performing long-only managers will suffer large drawdowns at times in the cycle.
We are creating a list of funds that may have a greater arsenal of tools to utilise in order to smooth volatility and limit drawdown. We apply the same process to identifying these funds as our long-only picks. A great example of this is the KLS Sloane Robinson Emerging Markets fund, which we have recently introduced to our growth MPS.
We do not offer a balanced suite of MPS portfolios, instead we focus on growth and income outcomes. Looking at our most popular risk profile of 5/10, the asset allocation for both income and growth 5/10 strategies has an equity weighting of 55%, 30% in fixed interest and 5% in each of property, alternatives and cash.
Based on historic volatility and correlation data our 5/10 asset allocation has implied volatility of 10.75% and an average expected return of 5.86% per annum with a maximum historic drawdown of 13.7%.
It is our focus on finding the outstanding managers in each asset class or geographical region that, in our opinion, has resulted in the strong performance of our risk-adjusted growth and income strategies since inception in June 2016. Our Growth 5 MPS has returned 30.7% and our Income 5 MPS has returned 19.6% to the end of May 2018 (figures are net of fees).
Both strategies are benchmarked against ARC Balanced Asset PCI which returned 14.5% over the same period.'