Combined with the launch of a new breed of closed-ended funds offering access to esoteric asset classes ranging from timber to financing the construction of oil rigs, there are few investment opportunities in the world that a manager cannot exploit.
These changes have heralded a new class of multi-asset portfolios which embrace the traditional asset classes such as equities, bonds and property plus a wide range of alternatives including agriculture, metals, structured products and defined-return funds.
Derivatives are often used to gain exposure to an asset where options for active management are limited or not required. They are also used to discard unwanted risks. For example, we are building a position in Andy Brough and Rosemary Banyard’s Schroder mid and smaller companies investment trust. Its shares have recently traded at a 14 per cent discount. Against this, we hold a short position in the FTSE Mid 250 index. We believe the bursting of the credit bubble will reduce the price paid for acquisitions by private equity houses. This means that bid premiums within many mid-cap share prices will evaporate over time. Our call is that such a scenario will allow the team to significantly outperform the FTSE 250 but there is a real chance that this will not translate into absolute returns. By selling a derivative, we are discarding market risk but retaining exposure to management ability and any tightening of the discount.
Multi-managers have had to learn a new skill – how to assess which capital structure is the most appropriate way to hold a manager. In the past, the only option would be a simple open-ended fund. Today, it is likely that the team you are researching will also manage mandates structured as hedge funds or 130/30 funds. It is possible that one type of fund will capture the strengths of a particular strategy or process. An example is Artemis’s SmartGarp stock screening tool which is used to manage unit trusts such as Artemis global growth by identifying likely winners and losers. Investing in a long-only fund captures the winners but fails to exploit the fact that the team has identified future dogs. Gaining exposure to SmartGarp via Artemis’s hedge fund is the conclusion. New legislation makes running a multi-manager fund more challenging but far more exciting with results to match.
Nick Greenwood is chief investment officer at Iimia