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Asset allocation: Axa IM’s Marwood defends Morningstar downgrade

Axa Investment Managers’ Richard Marwood admits he is not top of the pops right now, with his strategy having underperformed recently and his calls being out of favour.

The Distribution fund he runs has not impressed performance-wise over recent months, leading to Morningstar downgrading it earlier this month. The research house said the fund had an “inactive approach” and had delivered average performance recently.

But Marwood is not fazed. He admits his recent performance has been below his peers. He says: “Short-term performance is not as strong as it might have been.” According to him, this is the result of a tactical position he has taken in the bond portfolio he thinks will play out in the longer term.

The £991m Axa IM Distribution fund is short duration in its bond portfolio and has not gone near any corporate bond issuance, unlike many of the funds in its peer group.

“My peers are taking more risk with longer duration. We have stuck to our strategy and are only in short-duration bonds so our portfolio doesn’t have as much risk.”

Marwood says the strategy paid off in the recent period of volatility as a result of global stockmarket falls. “It was very, very stable in China volatility.”

He has also shunned corporate bonds, which he says have an element of equity risk in them that he prefers to keep in his equity allocation. “If you take risk to corporate bonds you take a fair amount in equity risk. We want bonds to be as pure, as defined as they can be.”

This approach in the bond section of the portfolio will pay off in any rate rise environment, either in the US or the UK, he says. “I suspect the fund will hold up reasonably well. If we see rates go up there will be pressure on the bond market and more impact on the longer end of the market.”

There is no getting away from the short-term performance though, which has seen the fund deliver a 1.7 per cent loss over the past year, compared with a 0.8 per cent return for
the Mixed Investments 20%-60% Shares sector. Over six months, the fund is fourth quartile and has made a 4.2 per cent loss versus the sector’s 3.5 per cent loss.

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However, Marwood thinks a five-year horizon is more appropriate for the fund and its investors. “The fund is aimed at cautious investors and aims over the long term to beat inflation.”

Over that time period the fund has outperformed the sector by a whisker, returning 33.3 per cent compared to the sector’s 32.1 per cent.

The recent underperformance has not led to too many questions from investors, says Marwood, as they understand his style and his longer term view.

“Most people who invest understand the story well. It is a very, very defined strategy so they probably already know why the short-term performance is what it is.”

On the equity side of the portfolio, Marwood looks for companies that have a certain type of business model, namely having high margins and not being overly reliant on labour.

For this reason, contractors and supermarkets tend to be excluded from the portfolio, while pharmaceuticals, tobacco companies and utility firms are favoured sectors.

This approach has resulted in an overweight to oil and mining stocks, which has also hit performance after the recent oil price drops. In particular, the fund has large positions in both Royal Dutch Shell and BG, which both fit the top-level investment thesis of the fund. BG is currently undervalued when compared to the price per share offered by Shell in its purchase bid, but Marwood does not think this is a sign the deal will not go through.

“I’m a long-time fan of BG. It’s trading at a discount to the bid price. There is a long time between the offer and the consummation of the deal, but there is nothing to suggest it won’t go through.”

The only concern he has is Shell may use the recent market falls to renegotiate the terms of the deal, but Marwood thinks that even that is unlikely.

Axa IM has recently added to Marwood’s funds, launching the Lifetime Distribution fund, which is aimed at the pension freedoms market. The fund is only available via Axa Wealth at the moment, but with a wider launch coming potentially later this year.

Marwood says asset growth on the Lifetime fund has been slow since launch in March, accumulating around £100m in that time. But this is the case across the market for pension freedoms funds, he says, as investors sit on the sidelines holding back on investment decisions.

The new fund will mimic the existing Distribution fund but will pay income monthly, rather than quarterly, and will have longer duration bonds in the portfolio, in line with the longer expected holding period by investors.

The fund has also launched with a lower fee of 35 basis points, which Marwood says is in light of the mass market product focus and large volumes expected to sell.

A knock-on fee reduction in the existing Distribution fund would “not be surprising” he says, reflecting the fee cuts occurring across the industry.

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