Simon Molica, fund manager - active portfolios at AJ Bell explains why their active portfolios won out in a turbulent 2018 for equity managers.
'Last February, AJ Bell launched the Active MPS Range, offering six active portfolios and two active income portfolios. This follows the successful launch of the AJ Bell Passive MPS range in August 2016.
The debate continues in the industry over active or passive investing.
Here at AJ Bell, the commitment is to offer consumers the choice, and, therefore, advisers are provided with a strong line-up of both active and passive portfolios. Today, the focus will be to review the active MPS offering (1-6 portfolios).'
'The active portfolios were launched with two key tactical asset allocation (TAA) positions, which reflected the strong views of the investment team, and these are centred on concerns in both the gilt market and UK physical property.
Return expectations for gilts have been reducing, with increasing downside risks mainly due to an extended interest rate cycle. Valuations have become so extreme that investors are facing the dilemma of potentially accepting returns that reduce future purchasing power. Therefore, the portfolios only own short duration gilts in order to reduce this duration risk. Let’s also not forget that duration risk has grown considerably in the asset class as maturities have lengthened in the gilt market.
With regards to UK commercial property, yields have been driven to such low levels that the sector appears unsustainable, meaning that the asset class could become overly reliant on income, with capital growth being challenged. Simply put, potential total returns are not attractive enough to warrant exposing the active portfolios to the liquidity risks of an open-ended direct UK property fund.
Instead, absolute return has been introduced in order to provide diversification benefits in a similar vein to that of UK property, but without the liquidity challenges and structural headwinds that UK commercial property currently faces.'
Fund selection since launch
'Last year was a difficult year for active equity managers in general. Indeed, it was a year to access market exposure in the cheapest form possible.
With increased stock correlations not rewarding fundamentals, active managers in aggregate largely struggled to make headwind against their respective indices in many equity regions. Aside from this market dynamic, the AJ Bell active portfolios enjoyed a strong 2018 in relative performance terms.
Over a short timeframe such as a calendar year, fund selection will always yield mixed results as one would expect in a multi-asset portfolio, where the diversification element promotes using a range of funds with differing investment styles and market cap focuses.
However, particularly beneficial to the active portfolios was a sizeable holding in Troy Trojan Income, whose main focus is on capital preservation through large cap UK income stocks – and during a year such as 2018, it did just that.
The dedicated technology holding in Polar Capital Global Technology was another position which bolstered portfolio returns. In fixed interest, M&G Emerging Markets Bond worked well, as its blended approach to emerging market debt provided support when local currency bonds sold-off.
On the negative side, our emerging market equities exposure hurt from both an absolute and relative stance. With this in mind, a sizeable holding in Fidelity Emerging Markets detracted from portfolio returns.
The fund suffered from an underweight in the energy sector, where a rising oil price provided a healthy boost to the sector, and a small number of stock selection issues hindered returns further. All told, the fund remains a high conviction position for the active portfolios.'