mark harris, head of investment management at edinburgh portfolio, is reducing the defensive weighting on his funds
It has been a rocky time at Edinburgh Portfolio, with the recent departure of managing director Paul Talbot, followed by the resignation of Nigel Whittingham, group business development director at parent company Edinburgh Fund managers.
However Mark Harris, head of investment management at Edinburgh Portfolio, is keen to stress it is business as usual for the fund of funds management group. Harris joined Edinburgh Portfolio from HSBC one year ago. The company's flagship products include the £74m Edinburgh Fund of Funds, which sits in the IMA's balanced managed sector, and the £48.2m Edinburgh Performance Portfolio, which is in the active managed sector. Other funds in the range include the £161m Managed Growth and £4m Global Growth funds.
Although the group has two funds in the balanced managed sector, Harris says Managed Growth is far more diversified and low risk than Fund of Funds.
There is also a suite of country-specific funds of funds, including a UK Growth, US, and Asian product. Harris is considering closing a dedicated technology fund of funds later this year due to lack of demand for the asset class.
How are your two flagship products Fund of Funds and Performance Portfolio differentiated?
Fund of Funds has about 15% fixed interest and cash, the rest in equities, and appears in the balanced managed sector, while Performance Portfolio is an equity-based fund of funds appearing in the active managed sector and so strips out the fixed interest component. Performance Portfolio is intended to be the racier of the two.
Is the equity portion of Fund of Funds a direct mirror of Performance Portfolio?
It is not a direct mirror, but there is a lot of commonality of the underlying funds. It is mostly the weightings of the funds that vary.
How many underlying funds are in each?
Fund of Funds has 27 holdings. Performance Portfolio has 23. In both cases this is at the higher end of the usual range. Usually the normal range of each fund is closer to 15-20, but currently we want to flatten the risk profile.
What is the maximum exposure you can have to a single underlying fund in each of these portfolios?
We can hold up to 20% in a single fund but the top holdings are more likely to be around 10% in these funds. Currently, the largest single holding in Performance Portfolio is Schroder UK Alpha Plus, at almost 13%. Schroder UK Growth also represents more than 12% in both Fund of Funds and Managed Growth.
How do the single country funds fit into the range?
Each holds about five or six underlying funds and are based on the individual country portfolios in the global funds. For example, the US fund of funds will largely reflect the US equity component of the mainstream funds. Individual holdings in the single country funds are all around 15%-18%, and again, cannot exceed 20%.
What process do you undertake before a fund is purchased by Edinburgh Portfolio?
We start by looking at the whole fund universe and do a number of statistical screens. Put simply, this is looking at risk and return over one and three years. These time frames are not necessarily better than any other time periods but the problem is that few managers have been around for much longer. If anything stands out, then we will look further back at that individual manager's track record and build a detailed statistical analysis.
If this still looks interesting, we ask the manager to send over details of what is in their portfolio and we put this through software called Star Research. This determines where their biases and style tilts lie. It also determines sector bias, large and small cap positions, risk and tracking error and so forth. At this stage we also do some due diligence, by asking them to complete a questionnaire. Then we will interview the manager. This is very detailed and in-depth and it may be five or so people from our team that will see a manager. For example, with the team that manages Neptune UK equity, we would have interviewed them for around 10-12 hours over the course of several days.
What form of ongoing monitoring is employed?
At an individual fund level, every six months we will have a two-hour meeting with a fund manager to discuss any developments. We are also frequently on the phone to them in the interim.
From an overall point of view, every Tuesday the committee at Edinburgh Portfolio will sit down and go through the portfolios. We consider whether there are any changes to our market view. At this point we will also scrutinise all of our fund managers to ensure all funds are liquid and so on.
Do you employ a top-down overlay?
We do make asset allocation decisions based on our top-down view but we try not to take bets that are too big, so they are all in very tight ranges relative to our composite benchmark. We prefer to make most of our bets at the fund level. But when necessary, we will take top-down views. An example of this is our recent holding of a position in Merrill Lynch Gold & General.
What themes are present in the portfolios?
There is a lot of uncertainly at the moment. As well as geopolitical risk, the high level of spending by the US consumer has kept the economy afloat and I don't expect that can continue. Certainly in the low inflation environment, margins will suffer. With the exception of China, it is hard to see growth coming from anywhere.
Meanwhile, Europe has its own problems and the European Central Bank does not seem to have a firm grasp on those. The UK's situation is also quite puzzling ' despite being very defensive it has been one of the worst performing markets this year.
A lot of this is the result of insurance companies struggling with their liabilities and fairly aggressively selling FTSE 100 companies.
So we have a world of extremes and this has created a very uncertain environment. As a result there are big rotational swings when people get excited about the potential for recovery, followed by disappointment.
Will this market environment continue?
We think it will. Volatility is good and bad in that although you can lose some money, it also presents the opportunity to add value. So far we have been able to play that volatility really well, with the exception of last October when we were a bit too defensive at a time when the market rallied, so we gave back some performance at that point.
The portfolio was quite defensive last year, and that paid off in performance terms. As well as having about 8%-10% cash, the nature of our holdings was also more defensive.
Now the portfolios are not as defensive as they were last year, but they are marginally defensive. We expected quite an explosive equity rally out there at some stage and didn't want to get caught flat-footed. However, while we are seeing a strong rally now, this could retreat.
What have you been buying and selling across the funds recently?
We recently sold GAM UK Diversified. We felt the style and risk characteristics would not give us the correct exposure in the event of a market rally. Obviously, that has been the right decision as there has been a rally in quality large-cap stocks with relatively high betas. The manager, Andrew Green, wouldn't have given us the right exposure to this so it was a tactical move. We held about 6% in this fund and sold totally out of it. We have also sold out of Merrill Lynch Gold & General from 2.5% to 0.5%. At the time that the market hit around 3,200 in mid-March, we had about 5% cash. The day after it bottomed, we put a lot of that into the Merrill Lynch UK Dynamic fund and bought some Artemis North American.
We also bought two small positions, 0.75% each, in Close Finsbury Technology and Putnam Emerging Information Sciences fund, another technology fund. We wanted to up the beta.
Is it a positive move that more and more companies are launching funds of funds?
My concern is that some of these will not be good quality offerings and many investors will not be able to distinguish between the good from the bad, which could sour the reputation of this asset class. However the good thing is that it brings a lot of publicity to this type of investment. And the recent popularity is saying that fund of funds is a strategy well worth considering.
FUND MANAGER: Mark Harris
Mark Harris joined Edinburgh Portfolio in January 2002 as head of investment management. He is chairman of the investment committee and a director on the Edinburgh Portfolio board.
He worked for HSBC Asset Management from July 1995 to 2001. From 1999, he managed £600m of assets in third party funds.
From 1989 to 1995 he worked at Schroder Unit Trusts and Aetna Unit Trust Management (1987 ' 1989). He started his career with Municipal Mutual Insurance (1984 ' 1987) as a claims investigator and underwriter.
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