Holding a macro hedge fund that had ‘nothing to do for two years’ is one of the asset allocation calls to come to fruition for Smith & Williamson’s James Burns, co-head of its managed portfolio service (MPS).
Playing the out-of-favour Japanese growth story and going short duration on bonds are the other two strategies that have most helped the firm’s Balanced Income portfolio recover performance recently, after miscalling the effects of the Brexit referendum in 2016.
Over the past three years, the portfolio has delivered a cumulative return of 35.1% compared with 38.3% delivered by its composite benchmark (which combines indices for nearly every type of bond, equity and alternative asset in the portfolio). But in the past year it has returned 6.5% in comparison with the benchmark’s 6%.
A key driver over the past year has been its non-benchmark position in BH Macro, a hedge fund dedicated to global fixed income and foreign exchange markets, which makes up 2.6% of the portfolio.
Burns said: ‘Macro managers have had nothing to do for the past couple of years. Rates have been going one way and returns have been pretty stable.
‘But this year, we’ve had the Italian elections and bond market sell-off; quantitative easing in Japan; rates rises in the US and the UK. Bond yields have been going down and equity markets are negative, while this fund has been up 11%. That more than justifies its position in the portfolio.’
Other calls Burns feels have paid off include the allocation to Japanese equity, held through the JP Morgan Japan and Man GLG Japan Core Alpha open-ended funds, as well as the closed-ended Baillie Gifford Japanese Trust.
Burns has a bias towards growth managers, and added the ‘Japanese growth story has been particularly interesting’ in recent years.
But he has reduced his allocation in the Baillie Gifford trust after long-serving manager Sarah Whitley stepped down last year, having managed the fund since 2001.
Burns said: ‘While we have full confidence in the new team, we felt it made sense to take a little bit of money off the table.’
The fund, which over five years has returned 96.3% compared with the sector average of 75.3%, is now run by Citywire AAA-rated Matthew Brett.
One call that did not reap rewards was the portfolio’s allocation to exclusively active UK managers following the EU referendum result.
‘Our list of managers in the UK is all active. So by the very nature of that they were underweight the FTSE 100 and, in particular, very underweight the 10 stocks which drove the market higher in the six-to-nine months after Brexit.’
The Balanced Income portfolio has a 64.8% weighting to equities and a 24.7% weighting to bonds, but the portfolio is underweight compared with its benchmark. Burns said: ‘Our house view is that we can go one of two ways in the next decade: deflation or inflation. We suspect the greater will is for inflation. That’s why we’re short duration bonds against the benchmark.’
But one holding acting as a ‘counterweight’ to its underweight position in bonds, Burns said, is the Janus Henderson UK Absolute Return fund, making up 2.1% of the portfolio.
Burns does not hold Standard Life’s embattled Global Absolute Return Strategy fund or Aviva’s Aims strategy. He said the Henderson fund is ‘holding its own’ at the moment, hence its inclusion in the portfolio.
Burns also has a 7.2% position in property, held through two close-ended funds: the Pictet Property Income fund and the UK Commercial Property Reit.
Following the Financial Conduct Authority’s recently published consultation on open-ended funds holding illiquid assets, Burns feels it is particularly pertinent that its exposure is entirely through closed-ended vehicles.
He said: ‘We don’t hold any open-ended funds in our property allocation. In 2016 when you had some of the big property funds gating, it was a problem for the adviser community. Because of these open-ended funds, anyone who held an MPS on a platform had their money stuck. But because our allocation was to closed-ended funds, we had that liquidity on platforms.’