Jacqueline Lowe, manager of the Standard Life Investments Dynamic Distribution fund, tells Rebecca Jones why she is betting on UK property this year.
1 What has driven your strong performance over the past five years?
Primarily, the fund has benefited from its bias to UK equity portfolios, which currently make up over 50%. The SLI UK Equity Unconstrained fund and the SLI UK Equity Income Unconstrained fund – two of the largest holdings – have been top decile performers in their own respective sectors over one, three and five years. We make full use of the asset class specialism available across SLI and benefit from access to a broad selection of strongly performing funds.
The allocation to property through both listed vehicles and direct investment provides increased diversification plus a hedge against inflation risk. Absolute return differentiates the fund from the majority of its peers within the sector, with its holding in GARS and our Absolute Return Global Bond Strategy (ARGBS), which have both generated positive returns while helping to reduce overall volatility. Furthermore, ARGBS helps to reduce duration risk while maintaining exposure to bonds.
“ We expect to increase our property holding in 2014 ”
2 What are the particular challenges and/or frustrations you have faced during this period?
Globally, it has indeed been a challenging time for investors. We have seen a steady stream of fairly unique market events in recent years, starting with the global credit crunch, subsequent UK banking crisis, Greek debt, eurozone fallout and obviously the more recent US fiscal cliff uncertainty.
Throughout that turbulent period, the fund has continued to provide positive returns, which can largely be attributed to the fact it is not tied to a static weighting between the main asset classes. As a result, we are able to increase or reduce our asset class holdings to exploit expectations of market growth and effectively manage risk levels for our investors.
3 According to FE Analytics, your top ten holdings, bar one, are all FTSE 100 companies. Why?
Due to its fettered ‘fund of fund’ nature, the fund’s top holdings are a function of the preferred stock holdings of the underlying vehicles we hold. These stocks are held because of the attractive and reliable income track record, which benefits our underlying income funds.
Top holdings, such as HSBC and Rio Tinto, for example, provide more attractive yields, while, more recently, Vodafone – the third largest holding – has offered a special dividend as a result of selling on its stake in the US mobile giant Verizon Wireless.
4 You have quite a high percentage of the fund invested in property. Is this not a bit risky?
As at 31 January, the fund held 14.1% in property, which continues to offer opportunities for additional performance, as well as being a genuine diversifier. Our house view is currently overweight the asset class following better UK economic growth forecasts, which have increased expectations for property rental income as well as total return potential.
Consequently, we expect to increase our property holding during 2014. Currently, annualised total return growth estimates of 9.5% are forecast for the next three years. Supporting factors also include increased inflows from a variety of local and overseas investors, increased credit availability, plus the relative attractiveness of real estate versus real gilt yields.
5 How firmly do you stick to your investment strategy and why?
Our investment strategy lies at the heart of everything we do at SLI and our focus on change philosophy is key to maintaining our robust and repeatable investment process. The fund management process is no different and I draw heavily on the extensive capabilities SLI offers in terms of investment methodology and market insight.
Our focus on change philosophy centres on five key questions to frame our investment ideas. This provides a common investment language that we use across all asset classes.
6 Where do you expect the strongest returns to come from this year?
UK equities saw strong results in 2013 and stocks may enter a period of consolidation as investors digest recent gains and begin to mull the implications the improving growth outlook may have for interest rates.
Nevertheless, in our view, a strengthening economy is likely to be supportive of equities longer term. It is also worth highlighting that the UK is currently the fastest-growing major economy in the world – outstripping even the US in Q3 2013. With over 50% of the fund invested in UK equities, this should offer a positive outlook for 2014.
As previously mentioned, we also expect strong returns from property, as we expect an improving growth environment to bolster prices in the near term and for yields to remain attractive compared to government bonds in this relatively low interest rate environment.
The CV: Jacqueline Lowe
Jacqueline Lowe joined Standard Life in 1988, spending time in sales and marketing before being appointed assistant investment manager for retail. In 2001, she became investment director of mutual funds and fund manager of the Global Advantage and Managed funds. In 2003, she became head of mutual fund investments, becoming manager of the Dynamic Distribution fund from its launch in 2006.
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