First State’s Diversified Growth fund is the new kid on an increasingly crowded block, but after returning 14.65% in 2016, at a time when other absolute return funds were struggling, it may stand out from the pack.
Since launch in June 2015, the fund has logged only two months of of drawdown, and returned 20.82%, while UK RPI stood at 5.14%.
However, it is still early days as it has gathered just £20.3 million in assets during this period.
‘We are aiming to outperform over the long term, are ahead of our target as we start our third year,’ said Andrew Harman (pictured), manager of the Diversified Growth fund.
‘Over a five-year rolling period we are targeting Retail Price Index (RPI) plus 4% returns, over three years returns in line with inflation and over one year we target low drawdowns.’
However, he is adamant that the multi-asset solutions team, which manages $12.1 billion (£9.2 billion) globally through various mandates, is ‘not trying to shoot the lights out’.
But what has been the driver behind the performance?
‘The fund added emerging market debt and high yield corporate credit into the end of 2015. These allocations have been strong contributors to performance as corporate credit spreads have tightened along with a positive performance contribution for the currencies,’ explained Harman.
‘The other area of the portfolio that has provided significant contribution to performance, outside of selective equity exposure, has been our uncorrelated return strategies.
‘These look at relative attractiveness across equities, fixed income, currency, commodities and cross-assets and span to themes such as valuation, momentum or trend, carry and macro-economic variables.’
Unlike traditional multi-asset funds, the First State strategy does not require it to hold low yielding assets just for the sake of diversification.
‘Every three months the team meets to discuss what would go in the fund if the portfolio was created from scratch today,’ he said. ‘If there is a massive difference between what we own and the things we would like to own, then we make appropriate changes.
‘This flexibility in our approach is because we are not beholden to certain assets or allocation buckets, like some of our peers.’
An example of this is the recent decision to sell down the entire high yield holding of the fund.
‘This was driven by what we perceive as a change in the cost of holding these assets; we do not hold assets just for their diversification.’
Amalia Nunez, investment director fixed income and multi-asset solutions, added: ‘The fund is targeting attractively valued defensive allocations no matter where those might be, which means we have to be flexible in our holdings and dynamic in how we try to make returns.
‘We are trying to keep drawdowns to a minimum and this has been tested by several shocks in the last couple years, including Brexit, Trump and the French election when it has remained remarkably resilient.’
While confident that the team can continue to provide returns to investors, Harman also suggests recent difficulties faced by other absolute return funds are unlikely to continue.
‘As asset classes increasingly become uncorrelated, active management in the multi asset space and in particular alpha is going to be an important source of returns,’ he said.
‘Because we are not forced buyers of anything and because we are a global fund we are able to go in search of alpha where it is.