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Asset Allocation: Caspar Rock explains how duration call boosted performance

The Architas Multi-Asset Active Intermediate Income fund beat its benchmark last year by being “less wrong” on the duration trade, manager Caspar Rock says.

Outperforming the peer group by 1.1 per cent for the year to 30 November, the £214.5m fund was boosted by having more duration than rival funds.

Rock says this was due to his decision to move quickly when bond yields unexpectedly rose early last year.

“At the start of 2014 the consensus view was that equities would outperform and bonds would not,” Rock explains.

Instead, 10-year gilt yields fell from 3 to 2.5 per cent. They then collapsed in the second half of the year, with 10-year gilts yielding 1.5 per cent at time of writing.

That drove the IA UK Gilt sector to return 13.7 per cent and the UK Index Linked Gilt to 18.1 per cent over the year.

“We did question the consensus because it was so one way,” Rock says.

“But we were still underweight duration and then when things changed we went to neutral while a lot of our competitors remained with lower duration – or none – in their portfolios.”

Both sovereign and investment grade bonds were higher duration than the sector average over the year, Rock says.

“We were wrong, but we corrected our position so we were less wrong.”

In contrast, the fund stuck with emerging markets in the sell off, benefiting from a strong uplift since March. Developing markets were hit hard in the first quarter before rallying about 20 per cent by September. The MSCI Emerging Markets Index has slipped back but finished the year up almost 9 per cent.

“We didn’t add to our positions, but we didn’t lose faith,” Rock says.

The fund has a large position in the £2.1bn Aberdeen Global Emerging Market Equity fund and a smaller holding in Richard Titherington’s £343m JP Morgan Global Emerging Markets Income investment trust.

After cutting UK equity exposure ahead of the Scottish independence referendum, the team decided not to return once the dust had settled.

The portfolio – and the rest of the multi-asset range – has an income bias, he explains, which helped in last year’s volatile markets.

In the UK, the Intermediate fund uses Adrian Frost’s £7.1bn Artemis Income and Neil Woodford’s £4.2bn CF Woodford Equity Income, with a smaller allocation to the £2.7bn JO Hambro UK Equity Income fund, managed by James Lowen and Clive Beagle.

The team bought into Woodford’s fund, switching from his old Invesco Pertpetual Income fund. The Invesco fund has shrunk almost 40 per cent since Woodford announced his resignation in October 2013 and currently holds £6.7bn.

Rock says he has added to the Woodford fund as well because he expects the manager’s style is “coming into favour” with increased volatility likely to continue into this year.

The Intermediate Income fund has been steadily buying property funds for the past 18 months. Due to its Ucits structure it is restricted to closed-ended funds. It has picked up shares in hospital owner MedicX and the Ground Rents Income fund, which has a 4 per cent yield.

Most of the property exposure is in Richard Kirby’s £959m F&C Commercial Property trust.

It allocates to many obscure funds that invest in parts of property that do not move in lockstep with equity and bond markets.

The fund also holds positions in both alternatives and alternative fixed income.

The 11 per cent exposure to alternatives is in real asset funds, and is a microcosm of the Architas Diversified Real Assets fund launched in December.

The Intermediate Income fund has invested in real assets since 2006, as Rock believes they offer better diversification from vanilla equity and bond markets.

The 8 per cent held in alternative fixed income includes mortgage-backed securities and floating rate loans.

A robust discussion on the relative merits of increasing weightings to Europe and Japan dominated the latest asset allocation committee meeting, Rock says.

The fund has been slightly overweight equities in general, including US equities.

Europe and Japan are interesting but not quite compelling enough for the fund to move from US equities, he explains.

“If you want to be overweight Europe and Japan you have to be underweight somewhere else – you can’t be overweight everything.”

Fears about the future of Greece in the lead up to its pivotal election, the poor outlook for the euro and the shoddy earnings growth are balanced by tremendous underperformance which is likely to catch up at some point, he says.

Rock is more wary of Japan and its considerable – yet haphazard – growth.

“They are just going to keep doing QE and weakening the currency, aren’t they.

“We’ve been in the game too long. It seems to outperform one year out of five.” 



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