BMO Global Asset Management fund manager Robert Burdett has more than halved the exposure to passive funds in most of the multi-manager funds amid fears of a bubble in the market.
Burdett, who co-manages the £1.2bn F&C MM Navigator Distribution fund with Gary Potter, says the team has been cutting exposure to passive funds across the board believing the performance of active funds is coming back into favour.
The team has mostly reduced positions in the UK where the active versus passive debate is weaker than in the US, Burdett says.
“It has been well documented that a lot of money has gone into passive funds in recent years,” he says. “It is now starting to change; since the end of September seven equity groups have been outperforming.
“Part of that is that the dispersion of asset valuation has got bigger. Passive managers have been buying bigger companies so valuations have become a bit more stretched.”
Burdett says at the moment he can find better performance from active managers. He feels a possible bubble could afflict parts of the passive community should markets change direction.
The F&C MM Navigator Distribution fund was carried over from F&C Asset Management when BMO bought the firm in 2014. The fund has a historical yield of 4.7 per cent, versus an average yield of 1.6 per cent for funds in the Mixed Investment 20-60% Shares sector, according to Lipper.
The team is well-known for holding offshore funds and smaller funds with capacity controls as well as funds from boutique firms, especially when they are at an early stage of launch.
As with all the multi-manager funds at the firm, the F&C MM Navigator Distribution fund prefers to hold between 25 to 35 funds to allow for higher alpha, says Burdett.
The fund manager says in recent months the team has made some “excellent” returns from funds like Hermes Global Emerging Markets, Conventum Lyrical, Edgewood US Select Growth, Old Mutual UK Dynamic Equity and Memnon European.
In particular, he picks the Hermes Global Emerging Markets and the Old Mutual UK Dynamic Equity funds as among the best performing funds in the group. The £2.7bn Hermes Global Emerging Markets currently makes up 2.5 per cent of the fund.
Burdett says: “The manager of the fund, Gary Greenberg, is a very experienced manager. Hermes is a boutique that limits the capacity of the funds and has a very sensible approach to valuations.
“At Old Mutual Global Investor, we hold Luke Kerr’s £539m UK Dynamic Equity fund. He is one of the best mid-cap managers in the UK and he has also soft-closed the fund for capacity concerns.”
The manager says the firm does not highlight funds it has sold.
The team is also using futures and options to buy protection while low volatility makes this “a cheap insurance”, Burdett says. The US remains an underweight for the fund and the team prefers buying into Europe. European equities make up 10.5 per cent of the fund.
Burdett says: “In asset allocation terms we added to the US several months ago as growth accelerated although we remain a little underweight due to high valuations.
“Before that the major change was going from underweight to neutral in Europe in early 2016 as the recovery finally looked on track there.”
As of 23 October, the F&C MM Navigator Distribution fund has returned 43.5 per cent over a five-year period compared to the 36.9 per cent average of the IA Mixed Investment 20-60% Shares sector.
Burdett says: “2017 has been broadly good for our strategy so far and our belief that equities were okay but conventional bonds were challenged.”
Burdett has been co-head of the team for 21 years alongside Potter and has been running the current fund range for 10 years. The pair lead different sectors for research and split other management tasks between them.