Craig Heron of New Star describes his active approach for absolute returns with the New Star Tactical Portfolio
Asset allocation is clearly an important driver of investment returns, albeit not to the extent quoted by a number of organisations. Within our range of fund of funds, the majority of portfolios are benchmarked against their peer group averages, aiming to beat the median return each year by an amount that should result in top quartile performance over rolling three-year periods. This benchmark extends into asset allocation decisions, where a tolerance is established for each portfolio, constraining the level of active country bets that can be taken.
An active approach
The one fund within our range that does not have any formal limits on asset allocation is the New Star Tactical Portfolio. Here the investment strategy was altered in 2004, in order to relax the asset allocation controls, which allowed us to add a higher degree of alpha through tactical asset allocation calls.
The approach taken on the fund is to seek out those areas where we believe absolute returns will be generated. This active approach encompasses asset class decisions as well as geographical calls, and currency hedging. The non-benchmark approach can lead to high weightings in cash and fixed interest securities when a more cautious view on market returns is deemed appropriate. This focus on absolute returns is unusual in the long-only marketplace.
While it results in a high risk relative to a benchmark index (ex-anti-tracking error was 9.3% relative to the MSCI World Index at end of June 2005), from the client perspective this arguably makes it a less risky approach in terms of likely market downside. The Tactical Portfolio is probably still more suited to the younger or less risk adverse investor because of the aggressive asset allocation mandate, but the absolute return perspective could also appeal to more mature investors still seeking capital growth.
The portfolio has had a high turnover level, and we have been quick to take profits on successful investments. Through the course of this year, this has resulted in holdings in Gartmore Latin America, Putnam Emerging Information Sciences, dit-Thailand and Investec GSF Global Energy leaving the portfolio. Major positions in the portfolio now include Japanese smaller companies (Legg Mason Japan and BDT Invest Japanese Smaller Companies), gold (Merrill Lynch Gold & General) and Germany (Baring German Growth).
Japan appears to be emerging from a long period in the doldrums, with economic growth surprisingly on the upside and deflationary pressures easing. Although any setback in global growth would undoubtedly affect our outlook on Japan, we believe that domestic demand is showing signs of improvement aided by the nascent recovery in real estate prices. On Germany, it is evident that 'no' votes on the EU constitution in both France and Holland have left doubts over the future direction of the Eurozone. However, if it encourages the European Central Bank to stimulate the languishing economies in the region by cutting interest rates, then we should see these events as positive developments. The German market offers good value, where investor expectations for economic growth are already exceedingly low and we believe there is room for upside surprise.
With US leading economic indicators improving despite ongoing Federal Reserve monetary tightening, the impressive equity rally that began in May could have further upside potential. The portfolio will aim to take advantage of tactical opportunities to participate in this upside, but we also feel that it is prudent to protect gains as much as we can, given the extended nature of this equity rally.
The New Star Tactical Portfolio does not have any formal limits on asset allocation.
The group seek out those areas where absolute returns can be generated.
The active approach encompasses asset class decisions as well as geographical calls, and currency hedging.
The non-benchmark approach can lead to high weightings in cash and fixed interest securities.
While the group has high risk relative to a benchmark index, this approach arguably makes it less risky in terms of likely market downside.
The Tactical Portfolio is probably more suited to the younger or less risk adverse investor.
The portfolio has had a high turnover level, and has been quick to take profits on successful investments.
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