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GAM’s Hepworth protects fund amid China uncertainty


GAM fund manager Charles Hepworth has reduced the emerging market allocation in his fund following the market crash in China and turned to fixed income and absolute return for investment protection.

While the manager believes the £289m Star Balanced fund will continue to benefit from developed markets, he warns uncertainty surrounding China in the short-term will keep fund managers on the alert.

He says: “The short-term market outlook is going to be very puzzling for many investors as they are trying to see more clarity from China, which is becoming more illiquid. Overall it is very difficult to see what’s going on there.

“It is an economy which has never been totally honest with some of its problems. The 7 per cent growth rate they aim to achieve is completely fictional. It is probably well below 5 per cent currently and will continue to slow down.”

Hepworth says the various measures taken by the Chinese authorities, including the currency depreciation and the interest rates hike, are “a bit cry for help” and a sign of “desperation”.

“When you’ve got a central bank buying assets in the market in the last two hours of trading just to support it, it is totally rigged as far as we are concerned.”

The fund has had little exposure to emerging markets “for a long time”, says Hepworth. He gradually decreased the allocation to 3.8 per cent in August. This has subsequently been cut to 1.9 per cent, a holding the fund manager plans to maintain until markets stabilise.

Hepworth has reinvested resources into the absolute return slice of the fund, currently at around 12 per cent, as well as in alternatives, focusing particularly on the property market.

“We were searching for something that could give us that kind of long- term return stream, something that could be reliable. Sometimes that is going to be an equity issuance coming from property companies in Europe and the UK.

“The absolute return content on the portfolio is higher than a lot of our peers and we use it as a complement to our fixed income position.

“It has been one of our better performers, reaching a 2.7 per cent return over the year.”

The fixed income component has been the fund’s next best performer, returning 2.48 per cent over the year.

Hepworth says the fixed income position of the fund has been boos-ted through its “exotic” fixed income holdings, such as the Allianz Sterling Total Return fund and the GAM Star Credit Opportunities fund which make 2.1 per cent and 5.1 per cent of the portfolio respectively.

While emerging markets are not a big play for Hepworth, he maintains a large holding in Europe which he says will continue to outperform.

Although the end of the summer has proven very tough for many equity investors, Hepworth says he was prepared to navigate the storm.

“August was a wake-up call for a lot of people.  It was a reminder that momentum goes up and down. It was a bit of a shock to a lot of the market participants that haven’t done anything to protect their investments.

“Coupled with that, the PMI numbers in China were weaker than expected, especially on the services side, indicating a wider slowdown.”

The fund, which sits in the middle of the five different risk-rated mandates in GAM’s multi-asset range, has significant exposure to global and European equities.

However, Hepworth plans to gradually reduce these positions over time. “We have already reduced our equity allocation from 70 per cent. That is quite high for a balanced fund but that’s when we saw opportunities in the first half of the year.”

The fund was 67.6 per cent invested in equities in August but it reduced this to 64.6 per cent at the beginning of September as Hepworth wants to reduce risks following the “volatility spike” in the market.

Within its equity exposure, the fund has 14.1 per cent in global equities, 15.2 per cent in the US, 7.5 per cent in Asia Pacific, 1.9 per cent in emerging markets and 25.9 per cent in Europe, which is the fund’s biggest overweight position.

While Europe and Japan are Hepworth’s key overweight positions, the manager is “less excited” on the US front.

He says: “The recovery is less evident and the slowing consumer sales is a bit of a problem, as well as a strong dollar for large caps. That is only going to get worse if the Federal Reserve goes through on hiking interest rates.”

Within the US equities exposure in the portfolio the Loomis Sayles US Equity Leaders fund, which makes 6.2 per cent of the fund’s holdings, returned 6.4 per cent over a year. The fund was positively affected by two of its holdings, namely giants Google and Amazon.

Hepworth says: “You can’t tell if it is a normalised recovery yet and that really dictates our underweights US equities. But we do like certain areas of the market which are more domestic exposed and which are not hammered by the stronger dollar.”



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