Gill Hutchison, investment research manager at Old Broad Street Research, takes a look at the firm's multi-manager category 'active asset allocation, absolute return bias'. Multi-managers working to this mindset can produce great results over the long term, but many can struggle over a shorter time period
First things first - what is meant by the term 'absolute return mindset'? There are not too many multi-managers operating in this space - maybe because it is a tricky place to be, given its rather nebulous position somewhere between traditional retail funds and absolute return funds.
In our view, multi-managers in this category can be described as those who are more interested in generating positive returns for their clients than they are in pursuing superior returns relative to a benchmark or peer group. They acknowledge that investors do not relish losing money even if an investment has outperformed the benchmark.
As MitonOptimal concisely puts it, the firm never loses sight of the fact the money it runs belongs to its clients and they want to see it rise in value. In the case of retail multi-managers, this manifests itself primarily through asset allocation strategies, which may be long-term and strategic in nature, or shorter-term and tactical, but which are ultimately designed to make absolute money for investors.
At present, retail multi-managers are mostly operating in a long-only context, which does limit their ability to protect the downside, particularly over short-term time periods - as we will see later. However, the advent of Ucits III and non-Ucits retail schemes or 'Nurs' structures is opening up new possibilities in this regard.
For the purposes of this article, we are going to concentrate on three multi-manager providers that we have placed in the 'active asset allocation, absolute return bias' category - Jupiter, MitonOptimal and Insight (specifically the Diversified Target Return or 'DTR' fund). They all manage the funds with an absolute return mindset and actively allocate assets to this end although Insight's DTR is the only fund that has an overt absolute return performance objective.
Jupiter Funds of Funds: The Jupiter fund of funds team runs four retail products that are managed with a long-term investment horizon. The team believes it is important to remain open-minded and to respond proactively and decisively to changing economic and market conditions. A key focus is therefore to identify important trends or inflection points.
The last major portfolio shift occurred in 2003, when they correctly repositioned the funds for stronger equity markets as the bear market finally ran out of steam. Since then, they have concentrated on themes they believe are likely to be fruitful long-term investments, such as natural resources and Japanese equities, where they have a significant overweight position.
A further characteristic is their willingness to invest with managers they believe will make money over the long term and, in such cases, manager selection may be a more important factor than asset class. To give a flavour of their active approach to portfolio construction, we can see that more than 30% of the Jupiter Merlin Worldwide Portfolio, which sits in the global growth sector, was invested in 'specialist/emerging/other areas' and included global energy, natural resources, emerging Europe and global financials as at 30 June 2006. These themes are of course tempered according to the fund mandate and portfolio construction is carefully considered across the fund range.
MitonOptimal: MitonOptimal is more overt about its absolute return objectives, as the earlier quotation testifies, although the funds do not have explicit targets. The managers firmly believe asset allocation is the most important driver of returns and manage four retail funds of funds to this end.
They also see cash as an asset class in its own right and believe that all investments should be considered in the context of the positive returns that are available from risk-free assets. They are cognisant of downside risk and the funds are structured around a defensive core, which is designed to protect capital and complement more volatile asset classes.
It is not uncommon to find the portfolios with high weightings in cash together with significant exposures to higher-risk areas such as Far East and emerging market equities, as well as specific themes such as real estate and resources. The managers also actively use structured products and, where appropriate, investment trusts. Historically and looking at the long term, the funds have demonstrated superior performance combined with lower than average risk.
Insight Multi-Manager: Insight's DTR fund has a clear absolute return target and therefore differs from the other funds in the group's range, which all have relative return objectives. The Insight team is able to use a consistent research and analysis process across the fund range but, thanks to the clear fund objectives and risk parameters that are applied to each of their funds, ideas can be efficiently and appropriately utilised.
DTR aims to produce equity-like returns over a full market cycle while preserving capital in falling markets. Historically, such returns have been cash plus 4% over the long term. The managers' search for alpha relies upon fund selection and asset allocation, although the latter plays a more important role in the DTR fund.
In seeking to achieve their objectives, they look to many different, uncorrelated sources of return and risk. Therefore, investors can expect the fund to be invested in an array of asset types with property, commodities, currencies, private equity and absolute return funds complementing the traditional equities, bonds and cash. Derivatives may also be used.
So has the absolute return mindset worked? Well, that depends upon your time horizon. Funds that use asset allocation very actively can be expected to perform differently from many of their peer funds and also differently from each other. Longer-term results generally stack up well for these funds but, over the short-term, many multi-managers have found the going tough and these three providers are no exception to that.
Given the structure of its mandate, Insight's DTR fund was able to limit the downside but, even here, performance was negative during the second quarter. Unless you were an outright bear fund, there was really nowhere to hide during that quarter except in cash. This period has shown us that, absolute mindset or not, negative returns are very difficult to avoid on a short-term basis.
Investment themes are often very long-term in nature and not all managers wish to or are good at responding to short-term market gyrations. It is only with the benefit of a longer-term track record that we are able to draw meaningful conclusions about the success or otherwise of a manager's performance. If that period spans a variety of market conditions, so much the better.
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