Jordan Sriharan, head of fund research at Thomas Miller Investments discusses how focusing on protection pays off for Thomas Miller.
'Our investment philosophy is focused on providing downside protection in difficult markets. This means fixed income is considered a friend not a foe.
We allocate across both sovereign bonds and corporate bonds, taking into account credit quality and duration within the fixed income allocation. Thomas Miller’s background in managing money for insurance companies provides an important discipline that aids in the construction of robust portfolios with the long-term in mind.
The fixed income allocations across all portfolios have moved to become more defensive in the last quarter. Portfolios were previously overweight in both UK and global government index-linked bonds which was offset by an underweight in nominal UK and global government bonds. This positioning had been in place for the last 18-24 months as we expected global inflation to move higher following the oil price collapse of 2015.'
'We do not believe that global inflation will remain at elevated levels and the bounce in commodity prices and the weaker dollar have run their course. This switch was considered against the relative attractiveness of yields on US Treasuries where the yield on the 10 year bond exceeded 3%. Today the portfolio has moved to a more neutral weighting across index-linked and nominal government bonds.
This switch has led to the selling down of some exposure in the actively managed Standard Life Short Duration Global Index Linked Bond fund and in the passively managed L&G Global Inflation Linked Bond fund. On the nominal government bond side we added to exposures in the actively managed Legg Mason Brandywine Global Bond fund and two passively managed funds, the db x-tracker Global Government Bond fund and the Vanguard US Government Bond Index fund.
As volatility has picked up in financial markets this year, so too has the need to be nimble across portfolios. While our asset allocation view on the UK equity market has not materially changed, we have been able to rotate exposure within the allocation to squeeze out higher returns.'
Move towards active
'For the last 18 months, we have moved increasingly towards active managers within the equity allocation, across all regions, as the economic cycle approaches the later stages. However, the first two quarters of the year provided an opportunity to switch back to passives, albeit temporarily, when the FTSE 100 fell to a low of 6,888 on 26 March.
As we understood the drivers of the sell-off (the larger index constituents, not typically owned by our active managers) we switched out of Artemis Income and Evenlode Income (managed by Hugh Yarrow, pictured) to fund an investment in the passively managed L&G UK Index fund.
By the middle of May the index had risen 12% while the two active funds had returned 7.9% and 8.8% respectively, at which point we rotated back to the two active funds while slightly lowering our overall UK equity allocation given the very strong run.'
The balanced mandate
'A balanced mandate at Thomas Miller Investment has an equity weighting at 55% of the overall long-term (or strategic) asset allocation. The strategic asset allocation to fixed income is 30%, the allocation to alternatives is 10%, while the cash allocation is 5%.
This portfolio has been constructed to generate a return of cash plus 3% as part of the wider suite of risk-profiled models. The performance of this portfolio has been strong over both shorter and longer time horizons, generating returns of 3.1% over one year and 15.7% over three years, up to the end of May 2018 (all figures are net of fees).
While the performance of the balanced mandate has marginally underperformed the cash plus 3% target over one year (3.5%), it is significantly higher than the average ARC balanced peer group (1.6%). Over three years the cumulative return of the balanced mandate has materially outperformed both the cash plus 3% target (10.9%) and the average ARC balanced peer group (11.8%).'