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Asset Allocation: Patience a virtue for JPM as it puts faith in Japan

Japan took a big hit in Q1 but JPM’s Tony Lanning remains confident, banking on Shinzo Abe’s long-term structural reforms

The JP Morgan Fusion fund of funds range has doubled down on Japanese prime minister Shinzo Abe’s planned “third arrow” of structural reforms designed to boost growth.

Fusion head of portfolio management Tony Lanning says he took the opportunity to boost his funds’ stakes in Japan earlier in the year. In the balanced fund, the allocation is now 7 per cent.

“We went into the start of the year thinking risk would work – and it didn’t,” he says. “All the things that didn’t work well last year mean-reverted in the first quarter and all the things that did well had a bad quarter.”

Japan took a large hit but Lanning is confident of the country’s prospects.

He says: “Many investors lost confidence during that period. We were buying more because while obviously the quantitative easing is imp-ortant, we’re much more interested in the longer-term reforms in Japan and we think you’ve got to be patient to benefit from that.”

The largest Japanese bet is a 4.7 per cent holding in the now soft-closed £5.6bn Polar Capital fund, which is focused on small to medium-sized companies. 

JP Morgan believes SMEs are best placed to capitalise on the changes. “Large zombie companies will continue to struggle,” Lanning says. “There will be more QE later in the year but I don’t think there needs to be for us to make money. Our portfolio can still make money even if the yen doesn’t weaken.”

Alongside Europe, Japan is the highest relative overweight for the fund, says Lanning.

European influence

Italy and Spain had a great start to the year, up about 15 per cent in the first half until the sell-off late last month. Lanning says the fund had fortuitously sold out of the countries to take profits, rotating into the German Borse, where valuations were more attractive.

“The picture in emerging markets is becoming more compelling and German manufacturers and exporters are best placed to make the most from that,” he says.

Slightly overweight emerging markets since launch, the fund has a holding in the non-mainstream but well-performing $2bn (£1.2bn) Delaware Investments Emerging Markets fund. Fusion is first quartile in the equity EM sector over one and three years to 6 August. For 2013 it made 11.23 per cent compared with the
sector’s 0.16 per cent.

Happy to play the developing world through equity alone, the fund sold out of EM bonds completely in May last year – just before the market collapsed in June.

“Why be clever when you can be lucky?” says Lanning.

mm210814Assetpiechart

Similarly, the resolution to retain sovereign bonds within the balanced fund, despite them falling out of favour, helped boost its performance this year, says Lanning. “That’s because I want it to behave like a balanced fund and it did work well,” he says. “The thing that shocked the market this year was that you made money off sovereign bonds.”

The fund’s bond duration remains low, at three to four years rather than the benchmark six to seven years, because of impending interest rate rises.

The allocation to core bond holdings remains relatively low at 13.2 per cent. The balance that would usually be tucked away in the asset class has instead been invested in alternatives.

mm210814Assetchart2

Hedge fund strategies, such as the long-short €352.4m (£283m) Melchior Selected Trust European Absolute Return, offer a counterweight to the portfolio’s equity bets.

Lanning is banking on a eurozone recovery but holds a 4.3 per cent position in Melchior because he believes it has the ability to perform whether the market rises or not.

“I don’t think [Europe] will under-perform but if it does, that fund is the hedge,” he says. 

“We feel they are better proxies for that than core bonds.”

The balanced fund holds 9.9 per cent in single and diversified strategy alternative funds, all of which have daily liquidity, he says.

High yield

High yield has been reduced by 2 percentage points to 3.8 per cent in recent weeks to take profit after “the easy money has been made”, says Lanning, although he and his team remain quite optimistic about the asset class.

“We’re not in the camp expecting defaults but we have worried about liquidity,” he says. “There is a danger when investors want to exit high yield, the doors will be very small.”

Keeping the balanced fund truly balanced in an exceptional monetary environment has been a top priority for the team, he says.

“It may sound daft but I don’t want everything to go up at once because obviously that may mean it could all go down at once as well.

“We want things in this portfolio to have ballast for all times.”

The portfolios have the ability to set themselves in a fundamen-tally different way from other funds, he adds. 

“At one point last year the Growth Plus fund had over 40 per cent in US equities while the average fund in its IMA sector had 30 to 22 per cent. We’re offering funds that are different.

“Unlike other firms that base their allocations on the UK, we look imm-ediately for where the best ideas are in the world.”

Lanning says the balanced fund underperforms the benchmark and sector because it has a more conservative equity range than the IMA Mixed Investment 40-85% Shares, taking a maximum stake of 70 per cent in equities.

According to FE Analytics, it has returned 1.45 per cent in the year to 7 August compared with the sector’s 2.07 per cent.

JP Morgan Fund of Funds

JP Morgan Fusion Funds is part of the JP Morgan Private Bank division and has access to its 60-strong team and ideas. Most of the private bank’s analysts are based in New York with a core group based in London. Clients need $30m to be admitted so the chance for retail investors to get access in pooled form is a great differentiator from other fund of funds ranges, according to Fusion head of portfolio management Tony Lanning. He manages the Fusion funds alongside Nicholas Roberts. The Fusion fund of funds range was launched in March 2013 and has amassed £31.3m.

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