Ask most investors about the turnover of a cautious fund and they tend to say lower is better. But Rathbone head of multi-asset investments David Coombs argues a lower-risk fund should have a higher turnover rate because it moves around to protect investors’ capital.
The £58.4m Rathbone Multi Asset Total Return Portfolio, which aims for a volatility rate equal to one-third or below that of the MSCI World Equity index, has had a much higher turnover rate than the £78.8m Rathbone Multi Asset Strategic Growth Portfolio – which targets two-thirds the volatility of MSCI World Equity – in most calendar years since launch.
Coombs says: “August 2012 was one of the most volatile periods of the past five years, with markets down 4 per cent in the morning then up 3 per cent in the afternoon, and we were rebalancing our Total Return fund on a daily, almost hourly, basis. Therefore I do not apologise for our turnover.”
Total Return had a “quite staggering” 145 per cent turnover rate in 2012 compared with Strategic Growth’s 79 per cent. In 2010, the figures were 105 per cent and 45 per cent respectively while 2013 realised 41 per cent versus 28.3 per cent.
“This shocks quite a lot of people,” says Coombs. “Most expect a higher-risk strategy to have higher turnover as you are trading and trying to eke out returns. The reality is turnover on our high-risk fund is our lowest. But there is a reason for that.
“When you invest in a higher-risk strategy, in theory your time horizon is longer, therefore you can be more patient. In a lower-risk strategy you have to take profits earlier because you are looking to preserve capital as much as you are looking to grow it.”
Total Return and Strategic Growth launched five years ago to sit alongside Coombs’ existing, more aggressive Rathbone Multi Asset Enhanced Growth Portfolio. There have been a number of changes to their asset allocation.
Coombs says: “We started off with a UK-centric portfolio and today it is the opposite. We have considerably added exposure to developed markets and that’s largely US and Japan.”
Total Return launched with 21.4 per cent in UK equities but this has fallen to around 5 per cent today. Strategic Growth launched with 23.2 per cent and has since fallen to 15.4 per cent. Developed equity weightings have moved from 6.9 per cent to 19.1 per cent in Total Return and from 14.5 per cent to 37.3 per cent in Strategic Growth.
There has also been a strong move away from investment-grade corporate bonds, reflecting Coombs’ view that the days of “super” bond returns are over. Total Return’s
exposure has been brought down from 33.9 per cent to 6.9 per cent while Strategic Growth’s was slashed from 19.6 per cent to zero.
Coombs flags up four key risks worth watching: the prospect of interest rate rises, China’s response to slowing economic growth, geopolitical tension surrounding Russia and the UK’s general election.
Although he sees opportunities in these risks, Coombs argues markets are now paying more attention to fundamentals than to the macro. “The micro really matters now,” he says. “We are not making any huge asset allocation bets at the moment – other than we hate fixed income.”
David Coombs joined Rathbone Unit Trust Management in 2007 and is a member of the firm’s investment executive committee, strategic asset allocation committee and collectives research committee. He is lead manager on the Rathbone Multi Asset Total Return, Strategic Growth and Enhanced Growth funds and co-manager on the Rathbones Strategic Bond fund.