John Husselbee's Henderson Independent Income outperforms average over three years to June 2001 with returns of 15.32%
Funds in the cautious managed sector have on average delivered positive returns over the one and three year periods to the end of June, hitting neither the highs with the tech boom nor the lows of its crash.
The cautious managed classification is a diverse combination of fettered and unfettered fund of funds along with direct equity and bond funds, making comparisons at times spurious given the variation in the composition of individual portfolios.
The sector's 60% ceiling on UK equity investments and focus on income targets means the portfolios seldom have the propensity to achieve consistently high double digit growth, but instead aim to deliver steady growth and income while maintaining a comparatively low risk profile.
Henderson Independent Income, managed by John Husselbee, has outperformed in each of the last three individual years, returning 15.32% over the three years to the end of June.
The fund is £68m in size and is currently 55% invested in UK equity funds. This exposure to domestic equities is split equally between five individual funds.
Husselbee said: 'When choosing funds, we look for consistency of investment performance, investment style and the experience of the manager. We look to create a smooth ride for investors, so we pick core holdings of funds some of which are more growth oriented and others more value oriented.'
For one fund to have a significantly higher weighting than the others, it would need to be backed by a very strong view from Husselbee that it would perform well in the long term, something which is very rare, he added.
Husselbee is currently holding HSBC Growth & Income, Newton Higher Income, SocGen UK Income, Invesco Perpetual Income & Growth and BWD Rensburg UK Equity Income. He said that HSBC Growth & Income, managed by Tim Russell, is the fund's core growth holding, while Newton Higher Income provides the portfolio's core value exposure.
Rather than invest in an array of star fund managers, Husselbee said he is looking to pick a team of funds that together will provide balanced returns.
He said: 'What we are trying to do is combine asset allocation and fund selection. It is very much a top down approach. Most value comes from the fund selection and picking the right managers. It is very much a team of funds put together.'
Husselbee said his portfolio currently comprises 18 different funds and has recently been rebalanced from a value bias to a more neutral style outlook, after taking profits in both Japan and the UK.
The fund's fixed income exposure is predominantly domestic, with 27% in UK Government and corporate debt and the remaining 5% in global fixed income.
He said: 'We want a balance across styles. It could be argued that corporate debt is more rewarding on balance, but we try to make incremental moves across the market. It is about diversification, not about high risk.'
Marlborough Equity & Bond, managed by Nicholas Cooling, is the smallest fund in the sector, with just over £400,000 in assets.
The fund has returned 12.53% over the three years to the end of June, outperforming the sector average by 1.71%. The fund has been run with a strong value bias in order to meet its target of increasing income returns year on year.
Cooling said: 'Because of the bias we have had toward value stocks, we have outperformed over the past two years. If you look back at the 36-60 month period, we underperformed because we had no exposure to technology. The fund is driven by the income objectives.'
The fund is a concentrated portfolio, comprising just nine holdings. Cooling targets high yielding equity and bond funds, preferring corporates on the fixed income side.
Marlborough Equity & Bond is broadly exposed to mainstream low beta value-orientated funds and itself has a below average beta of 0.97%, compared to a sector average of 0.99%.
Cooling's main holding is Credit Suisse Income, which comprises 20% of the fund.
Coolings sole growth fund holding is ABN Amro UK Growth. He said the fund has consistently produced strong returns despite having almost half the level of volatility of its peers.
He said: 'ABN Amro UK Growth is a good fund. To actually produce the results they have, with such a low level of volatility is a major achievement.'
Looking forward, Cooling is gradually moving toward a bullish stance on small caps and believes the broader market has just bottomed out, at least for the short-term. He said: 'I think the market is a pretty strong buy.'
Cooling added that given most of the large investment banks, such as Goldman Sachs and UBS Warburg, are still predicting a year-end height of near 6700 for the FTSE, there is potential for a substantial kick in the market, if these players put their money where their mouths are and pump money into the market.
Lazard Income Portfolio has returned 15.67% over the three years to the end of June, compared to a sector average of 10.82%. The fund, managed by Kieron Launder, has also outperformed over one year to the end of June, up 4.3% versus a sector average of a 0.33% gain.
The unit trust is run as a fund of funds and is currently fully invested in equity portfolios and marginally underweight fixed income and cash funds. Launder runs a tight portfolio comprised of 15 funds.
He said: 'This is the average number we would like to hold. Having 10 equity products gives us a good balance.'
The fund had been running with a growth bias until the second half of last year, when it began to up its weightings in more value-oriented funds.
Launder said: 'Within the equity portion of the fund we are looking right across the board and it can be value or growth.
'Last year we switched toward more of a value bias. We wanted to get the fund back to a more style neutral position, because it had been more growth-oriented.'
The fund has a relatively low turnover rate, with Launder investing in funds that consistently outperform, rather than taking any major sector bets.
'Where we are looking to add value is in fund selection rather than market timing. Buying a fund involves similar due diligence to buying stocks. You have to assess the investment style, resources available and the portfolio manager. We have to check that they stick to their brief and do not go off and buy other things,' he noted.
Launder's top five holdings include two fixed income funds and two UK equity funds and his top holding is the Portfolio Property Trust, which he says has performed well over the past 12 months.
Relative to the sector, the fund has the highest annualised beta, 1.17%, compared to a sector average of 0.99%, as well as an above average annualised alpha of 1.17%, versus a sector average of 0.33%.
Launder said it is difficult to pinpoint the exact cause for the high beta, given the lack of homogeneity in the sector.
He said: 'Maybe we have a higher equity content than others.'
Regression analysis: Regression statistics can be used to compare the relationships between funds, markets or a specific benchmark index. They do not make the assumption that the variables (funds) are related as cause and effect, but permit them to be influenced by other variables (markets).
Alpha: The Alpha describes the theoretical reward obtained by one investment when the second investment has a zero return. To calculate the Alpha, the returns of each are taken and compared together to identify their relationship. This reveals relationships between investments in both bull and bear markets. When applied to portfolios, it can be considered to be the return over and above (or below) the market through portfolio strategy. Good managers have a positive Alpha.
Beta: The Beta is the amount the first fund moves when the other moves by one unit. Beta is a measure of relative volatility (absolute volatility is calculated by standard deviation).
If one fund always goes up and down by 1.5 times of the performance of the index, its Beta will be 1.5. This implies that if the return of the index is positive, then 1.5 times this positive return can be expected of the fund. If the index goes up (or down) 10%, the fund goes up (or down) 15%. Beta represents the volatility of the first investment versus the second. It is only an estimate and to be accurate there has to be a perfect correlation between the two investments.
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