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Puma roars

Investment banking group Shore Capital claims its Puma absolute-return fund of hedge funds has bucked the trend for poor performance across the hedge fund industry by investing in a concentrated portfolio of managers.

The group says the fund returned 2.4 per cent in September and 12.9 per cent over the last 12 months. It attributes this to a focus on 15 to 20 of its best ideas alongside avoidance of convertible arbitrage, illiquid strategies and new managers with limited track records.

Fund manager Chris Leverton says: “The bigger funds of funds invest in 40 to 100 managers but your 40th idea is not as good as your 10th. If you are not paying attention to your 40th idea, a marginal investment could cost a lot of money.

“New hedge fund managers perform either very well or very badly but the statistics have a survivorship bias. We measure the funds that are still around, excluding the ones which did well in the first year then died.”

Cautionary tale

We are continually searching for ways to enhance client returns without incurring added risk or reduce risk without diminishing potential returns. Investing across many asset classes and using products from a wide variety of fund groups, we have a lot of freedoms which we use to construct efficient portfolios.

The most popular multi-asset choice among UK retail investors currently are funds in the cautious managed sector. Funds in this sector broadly have an even split between UK equities and bonds, with the objective of generating a balance between income and growth.

The sector can be broken into two sub-categories. First, there are products that are more income focused, which usually have a greater exposure to bonds. Normally the equity weighting will be around or below 40 per cent. Second, there are those that are more growth oriented, which usually maintain equity weightings closer to the sector maximum of 60 per cent. What is common to both is that diversifying asset classes, such as overseas equities, property, commodities, private equity and hedge funds, are rarely used.

We believe that by diversifying across many asset classes, it is possible to create portfolios with a much better potential return than these more constrained funds while staying true to the risk space in which the funds operate. To this end, we manage the Schroder S&P cautious managed distribution portfolio very much for total return, rather than income, across nine asset classes, referencing a proprietary strategic asset allocation framework which pays no attention to peer group average weightings. Below I have laid out our normal positions, which I think provide a good point of reference for any private investor.

l 35% UK equities.

l 15% overseas equities.

l 20% investment-grade bonds.

l 5% emerging market bonds.

l 5% high-yield bonds.

l 10% commercial property.

l 5% private equity.

l 3% commodities.

l 2% cash.

A second advantage to this approach is that having established a much broader opportunity set, a lot of value can be added by pro-active tactical asset allocation around these reference points. Happily, the vagaries of the investment cycle and inherent market volatility throw up lots of opportunities and it is incumbent on us as active managers to take advantage of this by giving emphasis to the best performing asset classes at the right time and vice-versa.

Although few managers follow the diversified approach that we advocate, nothing in our argument is revolutionary. Private banks have been using this sort of approach for wealthy clients for years but it is only since the new freedoms provided by Ucits 3 that we have been able to fully incorporate these ideas into our funds and bring them to the high street.

In the last few years, we have seen a remarkable variance in returns between asset classes and investment styles. If nothing else, the way markets have moved over this period should make us question the wisdom of the “two asset class, one geographic zone” approach to the management of funds in the cautious managed sector. With such a rich vein of opportunities to exploit, it would be just as valid to question the ambition of those who ignore them.

Two qualities common to many of the best managers are a desire to broaden their opportunity set wherever possible and a willingness to back their convictions, regardless of what the herd is doing. Why do so many cautious managed funds persist with an approach that appears so limited? Could the answer lie some- where between “because we’ve always done it this way” and “that’s what everybody else does”?


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