Gartmore Cautious Managed, unlike some others in its sector that have embraced ever more complicated asset mixes, sticks to the traditional portfolio make-up of equities, bonds and cash in order to achieve its objective of providing a combination of income and long-term capital growth.
Because of the cautious nature of the fund, the equity weighting will never go above 60% of the portfolio.
"I think we got our asset allocation right," says manager Chris Burvill. "In the last three to six months we have lowered our equity exposure down close to 40%, and raised our bond exposure from 35% to 45%, as well as raising our cash weighting. All the things we say we will do in these kinds of market conditions, we have done."
While he is positioned defensively, Burvill does not believe we will be seeing any doomsday scenarios. He is finding reason for cheer in the US economic backdrop when looked at from a historical perspective.
Historically, US earnings start to recover when interest rates have fallen about 60% from their peak - it takes a substantial fall to get earnings moving," he says. "At the moment, rates are only 40% below their four-year peak, which suggests they still have a fair way to fall. The Fed funds rate could go down to 1%, and it may even need that to get the economy moving again."
He adds that in the UK, from a valuation perspective, we don't really need a rate cut. "The dividend yield on equities is only 1% below the gilt yield, and by and large that's very good. If rates fall further, equities will look even more attractive. Equity dividends only need to grow by 1% a year and you've broken even against gilts. But investors are not listening at the moment - valuation is not high on investors' agenda."
The key in the current environment, says Burvill, is to stick with the asset allocation. Equities will benefit as good earnings numbers come through, and corporate bond spreads mean high-quality credits are producing respectable returns.
"We are underweight equities but will only occasionally, and for short periods, allow our exposure to go below 40% of the fund, so if there were a 10% fall in the market tomorrow, we'd probably be out there buying to get our exposure back up, as we feel the balance needs to be maintained," he says. "Also we can raise our corporate bond exposure and reduce our defensive equity weighting, and when we feel more positive we can go into more higher-beta stocks. When we feel the time is right, we will want to move the equity weighting up to 50-55%."
In an ideal world, says Burvill, he would be able to go through each of these steps within the remainder of the year, by which time markets will once again be in a more positive frame of mind.
"Much as we would love to turn more positive, we don't want to rush it. There will be more pain for banks and turmoil in the corporate credit markets. But we are very confident that the skew over the next six months will move more positive. Those who like to believe we live in the real world should discount some of the more bearish commentators; they are always out there but they tend to go quieter in the good times. My advice is don't fight the Fed - the next six months will see the interest rate cuts in the US having an effect."
Manager biography
Chris Burvill joined Gartmore in December 2002 as head of UK Equity Income and launched the Gartmore Cautious Managed fund in February 2003. Previously, he spent 10 years at Investec Asset Management where, he managed a number of successful funds including the prestigious Cautious Managed fund.
Prior to this Chris was with Commercial Union as a UK equities investment analyst and was promoted to sector manager in 1985. From 1987 to 1990 he was fund manager of the CU Income fund. On the acquisition of Royal Trust's unit trust business, he assumed responsibility for the Royal Trust High Yield and Equity Income funds.
Fund facts and figures
Basics
Launch date: February 2003
Manager: Chris Burvill
Fund size: £661.8m
Number of holdings: 117
Base currency: GBP
IMA sector: Cautious Managed
Benchmark: 50% FTSE All-Share 50% Merrill Lynch Sterling Non Gilts
Charges: Initial 5%/annual 1.25%
Minimum investment: £1,000
Risk/reward metrics
Alpha-1.04
Beta0.88
Information ratio-0.80
R squared0.92
Sharpe ratio0.16
Tracking error1.60
Top 10 holdings%UK Treasury 4% 07/09/2016 7.2UK Treasury 2.5% IL 16/04/2020 3.9UK Treasury 5% 07/09/2014 3.8UK Treasury 2.5% IL 23/08/2011 3.8BP 3.5UK Treasury 5% 07/03/2008 3.3Royal Dutch Shell 'B' 2.8Glaxosmithkline 2.7Treasury 4.25% 07/03/2011 2.7Euro Investment Bank 5.5% 07/12/11 2.3
Sector breakdown%
Government bonds 24.4
Financials 10.3
Government Index Linked 8.0
Corporate bonds 7.4
Consumer services 6.9
Oil and gas 6.3
Time deposit 6.1
Supranational bonds 5.7
Industrials 4.8
Healthcare 3.7
Others 8.9
Cash 7.5
Source: Gartmore (29/02/08)
