Anthony Gillham’s Generation fund range has had a much smoother ride than its peers by taking a defensive approach and underweighting equities to ride out the volatile start to the year.
At Old Mutual Global Investors, where Gillham co-leads the recently revamped multi-asset team, the fund manager has stayed underweight risky assets since the end of last year to make way for alternative solutions.
Given the “poor quality” of banks’ balance sheets, especially in Europe, Gillham says he did not want to give up investing in lending. Instead he went for closed-ended “niche” investment trusts.
He says: “If you look across the banking sector in Europe the asset quality of their balance sheet is quite poor. Similarly in the US, because banks are very capital constrained it is difficult to keep up with the demand.
“However, there is still demand for lending, whether this is targeted at consumers, SMEs or larger corporates.”
Gillham chooses investment trusts that invest in “very high quality names” with attractive yields such as the Honeycomb investment trust, geared towards consumer lending, and the Sequoia Economic Infrastructure investment trust.
The two holdings make up 2.3 per cent and 1.4 per cent respectively of the £50.6m OMGI Generation Target 4 fund.
The manager is also eyeing the comeback of emerging market equities after the recent cold sentiment towards the sector, with the consequent massive outflows. He says he is now “cautiously optimistic” on the sector, with 2.5 per cent in the fund, although he says he is willing to increase the position with time.
Gillham says: “We are moving slowly on emerging market equities although they’ve been beaten up over the past five years. From a valuation point of view they look very cheap, but valuations normally don’t tell you much about timing so we looked at other signs.
“We are cautiously positioned on sterling. We have diversification in the US dollar, which we think will rally in the event of Brexit”
“One is we’ll not have any other interest rates hike from the Federal Reserve for some time. Also, the performance of emerging market companies relative to US companies is more attractive. The US earning season coming up, from a revenue point of view, looks weak.”
The Target 4 fund sits in the middle of the range of four multi-manager and multi-asset funds in terms of risk. The range is directed at the post-retirement market, with each fund targeting a different annual income yield between 4 and 6 per cent.
The funds moved to OMGI from Skandia Investment Group, which merged with the asset manager in 2012. The range was managed by veteran fund manager John Ventre.
In a shock departure in September, Ventre left Old Mutual Wealth in a restructuring of the multi-asset investment team following the £585m acquisition of Quilter Cheviot.
Quilter Cheviot’s Ben Mountain and Gillham now lead the combined 24-staff multi-asset investment team.
Since then, the OMGI Generation range had been revamped. The team removed the income target from the portfolio, as Gillham argues “it doesn’t guarantee investors can get smooth returns”.
He says: “It is quite dangerous to get an income from traditional equity and bond strategies, especially when you see sharp market falls. That is because if capital value falls, your client has to sell low.
“It should be for advisers to sit down with the clients and get how much income they need to take off so in this way these funds are more flexible.”
Gillham says the fund now puts more emphasis on “true diversification” in the portfolio, not just in terms of assets but in the mix of global equities, collective investment schemes, other OMGI funds, companies’ shares and various fixed income assets.
A year ago the Target 4 fund significantly lagged the sector, losing 6.19 per cent against a loss of 1.7 per cent for the Unit Trust Unclassified sector.
However, the new strategy seems to be starting to pay off, with the fund returning 1.71 per cent against the 3.1 per cent sector average six months ago, and 4.25 per cent against the 5.7 per cent sector average three months ago.
To add an extra layer of defence, Gillham has also sought to Brexit-proof the portfolio, particularly on currencies. He says: “We are cautiously positioned on sterling. If we do have an exit vote we have diversification in the US dollar, which we think will rally in the event of Brexit.”
Despite a better reaction to market swings, Gillham says times remain difficult for investors in a global low-growth environment.
He says: “One fear I have is the world is still not in a great place.
“We are coming to an end of great experimenting in monetary policy. Quantitative easing was put in place by central banks to avoid deflation and despite nearly a decade of QE, inflation remains low, wage growth is hardly conveying as well.
“It is not yet certain this experiment has been a success. There are still risks of 1930-style deflation, given the high level of debt.”