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Morningstar fund analyst Randal Goldsmith picks three multi-asset funds that deploy alternative assets with success in their portfolios
This article is part ofMorningstars Guide to Alternative Investing; providing everything you need to know about property, commodities, infrastructure and other diversifying assets.
Newton Real Return is a strong choice for investors seeking a target-return multiasset fund with an emphasis on capital protection.
Iain Stewart is among the most experienced multi-asset target-return managers in the United Kingdom, and he has run the fund since inception in April 2004. Before that, he managed traditional balanced and global-equity mandates based on Newtons theme-driven process and has around 30 years experience in this style of investing.Stewart leads the real-return team of eight, which includes four other portfolio managers and an experienced strategist. The team constructs the Newton Real Return portfolio based on the in-house thematic view of the world and macroeconomic outlook. These are the central pillars that are reflected in sector positioning and stock selection in the fund. Indeed, there is a high commonality in the portfolios holdings with other Newton funds.
The fund targets one-month pound sterling Libor rate plus 4% gross annualised over five years with volatility in between that of equities and bonds. To achieve this, the mandate has full allocation flexibility across assets that can be accessed via tradable securities. In particular, the portfolio is divided between return-seeking assets mainly equities, and stabilising assets mainly bonds and cash, and the manager increases the latter when the team is cautious. A protective derivatives overlay, composed of option strategies, is also applied to limit downside on the return-seeking core.
Despite the brevity of its track record, there is a lot to like at Invesco Perpetual Global Targeted Returns.
The fund was launched in September 2013 after its three portfolio managers joined Invesco Perpetual from Standard Life Investments where they were senior members of the multiasset investing team responsible for GARS. The investment approach is very similar, aiming for cash plus 5% during three-year rolling periods with less than half the volatility of equities. From inception to end February 2016 the fund returned an annualised 6.0% gross annualised, 4.5% after fees,.
The mandate is free of benchmark constraints and can make use of the full range of liquid assets. Instead of traditional asset allocation, the managers construct the portfolio from individual investment ideas. While these are guided by the multi-asset teams broad investment themes, implementation is mainly by sleeves of securities that mirror Invescos underlying managers and generally show high active bets, although typically applied with derivative strategies around them to capture the original investment idea more precisely and protect in periods of volatility. Interaction with Invescos other teams is also an important source of ideas for the multi-asset team.
Since more than half of the portfolio is normally invested in securities sleeves, the remainder is cash collateral for derivative strategies, the fund has meaningful potential to generate alpha from underlying security selection. Invesco Perpetuals multi-asset team of 10 includes the three managers, a risk manager, three analysts and three product specialists, who are dedicated entirely to this strategy.
The benchmark-index-unconstrained multi-strategy approach applied to SLIs Global Absolute Return Strategies Fund has not changed since it was first applied to the groups in-house defined-benefits pension fund in 2005 before launching as this retail fund in May 2008. Over time it has grown to be one of the largest investment funds in the UK 25.8 billion, while total assets under management in the strategy are worth around 50 billion and its success has attracted several imitators.
It is fair to ask whether the opportunity set for this daily dealing fund has reduced with AUM growth. At the outset, the strategy was designed to be scalable, making significant use of liquid derivatives to implement the teams ideas, and there does not appear to have been any slowdown in the overall rate of idea generation. However, it is noticeable that on the portfolio breakdown by return source, less has come from security selection since 2007, although macro sources have always been larger; so the opportunity set does appear to have reduced at the margin, and the idea flow is something to monitor.
The team responsible for this fund has grown commensurately with AUM and numbered more than 50 at May 2016. So it is more than adequately resourced. However, after poaching of key staff by competitors, few of those involved at the outset remain. Team head Guy Stern joined at the beginning of 2008. Most of the other senior portfolio managers joined the team in 2012. The risk and structuring group has been the stable element, and its head, Brian Fleming, is one of the few who have worked on GARS from the outset.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a persons sole basis for making an investment decision. Please contact your financial professional before making an investment decision.
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Randal Goldsmithis a Manager Research Analyst with Morningstar.
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