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Asset allocation: Iboss backs property despite demand surge

Iboss managing director Chris Metcalfe says property continues to offer good returns but cautions against irrational purchases

Iboss managing director Chris Metcalfe says the firm remains a big fan of the property sector despite the rush of money entering property funds over the last 18 months.

The wealth manager says property continues to offer good returns to investors – as long as managers are not tempted into making irrational purchases when large chunks of money flow into their funds.

“We have been in the sector for some time and continue to see value in it, despite large numbers of people flocking towards the sector lately,” he says. “As long as managers are sensible and not desperately trying to get rid of cash by buying irrationally we think it is still good.

“That is what happened in 2005 – there was lots of cash coming into property funds and managers were buying anything they could to get rid of the cash, which obviously turned out to be a disaster. I think managers have learned from that.”

Earlier this year, Iboss closed down its passive investment offering to new business after a lack of adviser demand.

The firm manages around £500m of assets on behalf of adviser firms but says only 1 per cent of this was invested in its passive portfolio range, with the rest in its active managed fund portfolios.

Prior to the closure, Iboss had passive portfolios made up of funds from L&G, Blackrock and HSBC Global Asset Management.

Metcalfe says: “Our view was that markets were priced relatively high and that the easy beta play was coming to an end. On the balance of probability we think good active management is going to outperform passive alternatives. To quote the last few years of relatively strong passive performance is to miss the point.”

And while property remains a core holding within its medium risk portfolio, Metcalfe says US valuations are extremely high and he has sold down significant US holdings over the last 18 months.

He says the US exposure within the medium risk portfolio could be reduced down to a passive holding, while the firm is also considering selling out of the Franklin Templeton US Equity fund.

“The US does look stretched at the moment and we are currently looking at reducing our US exposure down to an index tracker to avoid paying over the odds for US stocks,” Metcalfe says.

While the US may be overvalued, Metcalfe believes European stocks are looking more positive following a desperate period for the economy.

“Obviously with the way things are we think Europe is looking interesting because valuations are so low,” he says.

When looking for alternatives, Metcalfe says Iboss has exposure through four absolute return funds.

In the UK, the wealth manager looks to all cap funds to enable it to generate the best returns from all-sized companies in the UK and avoid the lack of liquidity associated with small cap funds.

UK holdings include the £166m Ecclesiastical UK Equity Growth fund and the Franklin Templeton UK Manager Focus.

The Ecclesiastical fund has returned 111.57 per cent over five years compared to an IMA UK All Companies average of 66.46 per cent and is managed by Andrew Jackson.

The Franklin Templeton fund has returned 100.99 per cent over the same period relative to the same sector and is managed by Colin Morton and Paul Spencer.

“I think larger companies will tell you that liquidity is a problem but we look to all cap funds because we want the good aspects of different firms,” Metcalfe says.

Currently Iboss gains its emerging markets exposure through the Fidelity Europe Emerging Markets and Asia fund but Metcalfe says it is considering swapping that for the straight emerging markets fund.

The £144.6m Fidelity fund, managed by Nick Price, has returned 48.13 per cent over five years, compared to a IMA Specialist average of 21.14 per cent.

“We think the current fund has a bit too much European exposure and we would prefer a bit of a straighter emerging markets alternative,” Metcalfe says.

He says fixed income exposure is low and he does not see that changing any time soon.

“When you look at gilt yields are at the moment it is obvious there are very little opportunities in the fixed income space, so it is something we are steering clear of at the moment.”

To combat volatility, Iboss has looked to more global equity strategies for returns – something which Metcalfe says is paying off at the moment.

“To dampen volatility, we look to global equity funds so we are relying on managers’ expertise in that department.”

He adds he is also looking to managers’ skills to ensure Iboss has the requisite liquidity within its portfolios.

“We like funds to be liquid and managers know more about liquidity in the market, so we are looking to them to help us with that,” he says.

He adds that, because of the way Iboss runs the portfolios, the firm is looking for longer term returns rather than constant switching in search of short-term yield.

“We do have that long term approach and that is something which we communicate to advisers and their clients.”

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