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Asset Allocation: Cash is king for Schroders’ Brookes

The manager of the group’s £1.43bn MM Diversity fund has been battening down the hatches by slashing his equity exposure.

For Schroders’ Marcus Brookes, cash truly is king.

The manager of the group’s £1.43bn Multi-Manager Diversity fund has been battening down the hatches by slashing his equity exposure while simultaneously bolstering his cash reserves. 

On the back of his cautious stance, the fund now has a hefty 34 per cent in cash, but the actual level will be even higher if the cash weightings of his portfolio’s constituents are taken into account.

The group’s head of multi-manager, along with his co-fund managers, has to run a reasonably tight ship with their flagship vehicle, where typically they hold a broadly even three-way split between fixed income and cash, equities and alternatives.

“We cannot dial up the risk, we can only bring it down,” explains Brookes.

While the portfolio’s long-term performance remains ahead of the pack, up 32 per cent over five years, the fund manager admits 2014 was not “a diamond year”.

The heavy cash weighting and an ultra bearish stance on bonds, a sector which has very much surprised on the upside, hindered performance over the period. As a result, over the year to 16 December the fund is flat, while its peer group the IMA Mixed Investment 20 per cent-60 per cent Shares sector has delivered an average return of 3 per cent.

Even at the start of 2014 bonds only made up 11.3 per cent of the fund and currently represent around 9 per cent of its assets under management, of which 5 per cent is in the hands of the William Eigen run JPMorgan Income Opportunity Plus fund, a bond manager whose own outlook is presently far from bright.

“Our mandates afford us the flexibility to have high cash positions if other asset classes look relatively unattractive,” Brookes says.

“Almost irrespective of one’s economic outlook, the margin of safety in fixed income markets is wafer thin.”

Elsewhere, as a result of his defensive stance, positions were also snapped up in the GAM Global Diversification and JO Hambro Global Opportunities funds which chiefly focus on “cheap companies with a quality bias”. The move delivered mixed results over the year to 16 December, with the portfolios respectively achieving a loss of 3 per cent and a 5 per cent gain.

But despite the less than stellar year, Brookes is adamant he is making the right calls. He says: “I believe that interest rates will perhaps move up sooner than the market expects so holding too much in bonds makes no sense. Being contrarian you really do have to be patient, and that is what we are asking our clients to be at the moment. I am absolutely convinced we are right. It just has not worked yet.”

At the moment, the portfolio’s equity holdings sit at just over 28.3 per cent, the lowest level possible and notably previously held direct positions in Asia (ex-Japan) at 4 per cent and 3 per cent in the US have both been jettisoned.

Looking to world’s largest economy, while Brookes remains upbeat about its GDP growth potential, his feelings towards the US stockmarket are markedly different. Brookes highlights that even by early December, the S&P 500 had enjoyed well over 40 new highs during 2014 and as a result “valuations look stretched”.

He says: “The US market to us looks expensive but yet it seems to represent a safe haven for many. The stockmarket has been up for a very long time now.”

While Brookes has a domestic equity bias with some 14 per cent of the fund allocated to UK stocks, a position which has been pretty static throughout 2014, his real bets are being put on Japan and Europe, the latter of which he describes as “probably the most hated market in the world right now”. While a circa 3 per cent position in the troubled continent held relatively firm over 2014, in the past year Brookes more than doubled his stake in Japanese shares to 7 per cent, with GLG Japan Core Alpha being his main play.

He says: “Europe is going to be much better than people expect. If you look at it and Japan in terms of relative valuations, risk is on your side and both regions are seeing more cash being pumped into their economies. Abenomics is working. It is effectively doing the same level of quantitative easing as the US was, even though the economy is only a third of the size.”

But while Brookes is happy to hold his bulky cash position for the time being, he insists he wants to spend that money as soon he can but is just waiting for the right opportunities. “If you want to construct a portfolio today, you are minded to preserve capital and try and weave your way through what could be fairly tricky markets.”

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ABOUT SCHRODERS MULTI-MANAGER

Marcus Brookes and his multi-manager colleagues, including co-managers Robin McDonald and Joe Le Jéhan, joined the ranks of Schroders in July 2013 following the group’s much-documented £400m plus acquisition of Cazenove Capital. 

In 2014 the entire range of Cazenove multi-manager funds were rebranded under the Schroders name. Together, at the FTSE 100 listed asset manager, they now run a six-strong suite of multi-manager portfolios, which aside from flagship the Diversity Fund include Diversity Income, Diversity Balanced, Diversity Tactical as well as the Schroder MM UK Growth and MM International funds. All together the team is responsible for assets under management of £3bn.

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  1. Well that’s great news for his investors then…..paying an OCF of 1.74% to be sat in cash!!

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