Close Brothers is sticking with the UK despite being ‘cautious’ due to Brexit and attractive valuations elsewhere.
Co-manager of the Close Managed funds, Sam Grant-Dalton (pictured), said lingering Brexit uncertainty and decent corporate profit growth elsewhere meant he has reduced his exposure to UK stocks.
But he added: ‘The UK is still our biggest allocation relative to our long-term asset allocation. We are conscious we have UK clients with sterling liabilities.’
Grant-Dalton has held the Liontrust fund, run by Citywire AAA-rated managers Anthony Cross and Julian Fosh, since the portfolio’s inception due to its ability to ‘consistently deliver’. The fund returned 35.1% over three years to February 2018, compared to the sector average of 18.7%.
Grant-Dalton added: ‘We like the multi-cap approach, as well as the fact that Liontrust managers have skin in the game, both in terms of their business and the funds that they run. It’s about that alignment of interest.’
He also highlighted the Investec UK Alpha fund, run by former Threadneedle manager Simon Brazier, and praised its ‘strong’ risk-adjusted returns, with the strategy performing well against its peers in terms of standard deviation and maximum drawdown.
He said: ‘We know Simon from way back in his Threadneedle days. This is a core fund for us as it provides strong risk-adjusted returns and a quality bias. The focus on free cash flow yields makes it a core holding in the UK for us.’
Close continues to favour Europe, among other regions, over the UK due to the solid economic and corporate profit growth on the continent and has 11.09% allocated to Europe ex UK equity funds.
On Pease’s fund, Grant-Dalton said: ‘It’s high conviction stock selection and he’s very close to the businesses he invests in and their management.
‘We’ve known him from his Henderson days, he’s got a long-term track record and he’s well known. He manages to deliver consistently without swinging the bat.’
Emerging markets is another area in vogue for Close, said Grant-Dalton, as fundamentals start to improve.
He said: ‘Volatility has stabilised, we’ve seen a pickup in earnings for the first time in five years and China is pumping liquidity into the system, so it’s those fundamentals and valuations which look attractive.’
One emerging markets fund which springs to mind for Grant-Dalton is Schroder Asian Total Return, which fits Close’s ‘long-term cautious approach’ to emerging markets by enabling it to ‘participate in the market’ but with ‘more downside protection’.
On the Schroders fund, managed by Singapore-based Lee King Fuei and Robin Parbook, he added: ‘It’s designed to give equity like returns without the volatility. They use large locally based research teams to select top stocks and can mitigate downside risk by using tactical hedges so you get long-only exposure, but with less volatility.’
But while Close favours Europe, Japan and emerging markets geographically, Grant-Dalton said one of the biggest drivers of performance recently has been technology.
He has played the growth in such stocks through tech-focused funds such as Axa Framlington Global Technology, but also through other equity funds which have significant exposure to the sector.
In particular, he highlights the Baillie Gifford American fund, which holds the Faang (Facebook, Apple, Amazon, Netflix and Google) stocks and has a 27.6% sector weighting towards the information technology sector.
The fund has delivered a total return of 85.3% over the three years to February 2018, compared to the peer group average of 42.5%.
The Close Balanced portfolio also holds some absolute return funds, including Aberdeen Standard’s embattled Gars. Grant-Dalton said he will ‘monitor it closely’, but stuck up for the strategy.
He said: ‘It’s been a relatively tough space for the sector. They are obviously high conviction and it just hasn’t been an ideal environment recently, but we want to give them the opportunity to make it right.’