Mark Dampier’s Fund Focus
Since the turn of the millennium, the UK stockmarket has experienced two near-50 per cent declines. These occasions are still fresh in investor’s minds and many are still ruing investments made at what turned out to be peaks in the market. If you lose half of your capital, you have to double it just to break even, so it is little wonder funds seeking to reduce volatility and preserve capital have become increasingly common.
Another reason for the popularity of these total return or absolute return-type funds is that a big proportion of the investing public are nearing retirement or are already there. If you have accumulated a decent sum of money, you certainly do not want to lose it at this stage in your life. There may be insufficient time for markets to recover before you need it. Funds that aim to limit the downside, albeit capping the upside too, have a greater appeal.
Blackbridge diversified growth fund is among the lesser-known names in this area. Momentum Global Investment Management, listed on the Johannesburg stock exchange with a market cap of £2.5bn, launched the fund in March so there is only a short track record to go on although it also have a similar institutional fund, Momentum diversified target return, with a three-year history over an exceptionally volatile period.
The greatest fall in the institutional fund was 9.6 per cent against a FTSE 100 drawdown of 21.9 per cent and the MSCI World of 33.5 per cent. Overall, it has shown around half the volatility of the FTSE, even though it is up by almost 32 per cent against the FTSE return of 12.1 per cent. The fund is shaping up to be the type that many investors will be interested in and its maximum drawdown so far is 8.4 per cent against the FTSE’s 15.5 per cent.
While the fund’s main philosophy is to lose as little as possible, to beat cash, you need to take some risk. As such, the fund has a wide investment remit, including global equities, bonds and commodities, and the management team of Michael Allen and Christopher Mahon move the portfolio actively between these asset classes, depending on where they see the best value. They do this with reference to scenario testing to find assets that can produce the best returns across a range of economic circumstances. In other words, they look to take the optimum investment route, taking into account the best and worstcase scenarios as they see them. Wherever possible, they seek out uncorrelated investments to reduce the overall risk of the fund.
Within each asset type they also look to invest with the best managers. For example, they have been using Black-Rock for government bonds and Schroders for emerging market debt. They also will take a passively managed solution if they believe it offers better value.
At present, the fund is relatively cautiously positioned, with around 25 per cent in developed world equities and comparatively little allocated to emerging markets although they do feel opportunities are arising here. Although they expect a tough 2012, they feel corporate bonds, and in particular high-yield bonds, are looking exceptionally good value and this is where much of the fund has been invested for some months.
This is the type of fund that many investors should have at the core of their portfolio. The only problem is one of expectations. Should markets go up very strongly, sensibly managed, diversified funds such as this will tend to lag behind and look rather dull. However, for those investors focused on longer-term capital preservation without excessive volatility, it is certainly something to consider.
Mark Dampier is head of res-earch at Hargreaves Lansdown