‘This might be the most boring interview you’ve ever done,’ began portfolio manager Ben Conway. He pointed out how little has changed in his Hawksmoor Balanced Model Portfolio in the past 12 months.
He was surprised by the strong performance of global equities in 2017. But he said, if anything, the portfolio has become more defensive.
‘We’ve been positioned relatively cautiously for a long time. All we’ve really done is tweak down the risk profiles of our models and funds even further. If things get more expensive, we won’t chase that performance.’
Indeed, Conway has reduced the allocation to equities from 59.5% to 56%. And fixed income exposure has risen from 20% to 21%.
He pointed out some equity fund holdings had changed. ‘For example, we sold the Standard Life Global Equity Unconstrained fund, a 6.5% position. Then, we bought a 6% position in the Neuberger Berman Global Equity Index PutWrite fund: a fund few people will hold.’
Conway said the purpose of the fund was to give equity-like returns with low volatility. ‘It will lag bull markets massively. But it will outperform bear markets significantly by using very short maturity put options. This is perfect for a model portfolio, where you want some sort of permanent exposure to equity markets.’
Hawksmoor sold the Standard Life Global Equity Unconstrained fund due to uncertainty over management, following the merger with Aberdeen Asset Management. Conway was disappointed that Mikhail Zverev, the fund’s manager, left the business.
Property exposure in the portfolio increased last year via the F&C Property Growth and Income fund. ‘F&C is very good at targeting niche areas of the property sector, where we think there’s a lot of value,’ said Conway. ‘We don’t think there’s much value in traditional real estate of big office and retail.’
The portfolio manager emphasised the fund did not wholly comprise physical property, but includes a lot of property equities. He dislikes open-ended funds wholly invested in physical property, as these can be relatively illiquid.
Conway highlighted several funds that contributed significantly to the portfolio’s benchmark-beating 4.2% one-year performance. Old Mutual Wealth topped the list. For the 12 months leading up to 31 March 2018, it boasted a 17% return for its UK Smaller Companies fund.
He was happy with the portfolio’s exposure to Japan, praising the performance of its two Japanese funds. The Jupiter Japan Income fund was up 16%, while the Baillie Gifford Japanese Income Growth fund rose 12%.
A clear detractor was the portfolio’s 4% position in gold equities via the Old Mutual Gold & Silver fund, which was down 16% in the past year. But Conway thinks gold equities are extremely undervalued relative to the gold price.
‘In the past year the gold price has been stable,’ he said. ‘But gold equities have massively underperformed, which is why the fund fell.’
Glimmers of gold
Even so, Conway remains positive on gold. This is particularly because developed world central banks have debased their currencies, by printing lots of money. ‘And even better than owning gold is owning the companies that mine it out of the ground,’ he added. ‘Because when the gold price goes up, the operational leverage of those companies is massive.’
Conway was reluctant to give any short-term outlook. But he thinks the long-term outlook for risk assets is pretty bleak.
‘We won’t necessarily grow investors’ capital over the next year,’ he said. ‘No matter how defensive we get, we’ll always be fully invested in assets because that’s what people expect of our portfolios.’
Hawksmoor has no global resources exposure. Conway thinks the current economic cycle is very extended, due to having a prolonged period without a recession.
Right now, he is concerned about the cyclical risks of holding global resources at this point.