M&G Cautious Multi Asset outperforms peer group significantly under Jane’s tenure.
David Jane celebrated the third anniversary of managing M&G’s Cautious Multi Asset fund by significantly outperforming the IMA Cautious Managed sector.
Launched on 16 February 2007, the vehicle is ranked third out of 97 funds in the sector over three years to 19 February, up 14.4% against an average decline of 2.41% according to Morningstar. Over one year the fund is up 24.6% compared to the average 21% increase.
The fund aims to achieve income and capital growth through investment in a diversified range of asset classes, including equities, bonds, property, fixed income, leveraged loans and collateralised debt obligations.
Exposure to these asset classes can be achieved through direct holdings or collective investment schemes, managed by M&G as well as external parties. Asset allocation is complemented by a systematic approach identifying themes, regional preferences, sectors and investment styles.
Jane joined M&G in December 2000, becoming manager of M&G’s Cautious Multi Asset fund in February 2007. He joined from Axa Investment Management where he headed up the firm’s global financial research team.
The manager runs the fund as part of a multi-asset team, which works together to determine the portfolio’s asset allocation between securities, as well as the fund’s geographical spread.
M&G funds occupy four of the top five holdings. M&G Property accounted for 6.9% of the fund’s exposure at 31 January, followed by GLG Partners Japan CoreAlpha 4.9%, M&G Optimal Income 4.7%, M&G Smaller Companies 3.4% and M&G High Yield Corporate Bon 3.1%.
Equities are the largest asset class at 56%, followed by fixed interest 30%, property 7%, commodities 3.6% and cash 3.5%. The UK accounts for 58.3% of the portfolio followed by Europe 11.5%, US 10.6%, Japan 6.8%, and Asia ex-Japan 4.9%.
Cautious Multi Asset is designed to deliver a cautious fund as clients would want it, rather than as the sector defines them.
He says: “What does a cautious client really desire in the truly cautious space? It is a fund that does not get particularly killed in tricky conditions but can generate decent returns over the medium and long term.”
When M&G entered the market with the Cautious Multi Asset fund manager David Jane decided a back-to-basics approach was vital.
“We looked at the sector and said the way it was being managed it would struggle to achieve the outcomes it was promising investors,” he says.
Outcomes is a theme Jane focuses on a lot. “We basically take the view you have got to understand the market environment and risk/reward and then construct your fund if you want it to deliver outcomes,” he says.
“An outcome-based investment is the point of funds defined by a name such as ‘cautious’”.
He believes the relationship between risk/reward and asset classes is not a fixed outcome, and stresses the importance of moving into the right asset class at the right time.
“Most people think equities high risk, government bonds low risk, cash very low risk. And then they say in order to create low-risk outcome you need a lot more cash in government bonds and a lot less equity,” Jane says.
“This is not always the case – sometimes it is, sometimes it is not. Sometimes you want more or less and sometimes you want other asset classes.”
His other favourite reference is to his mother, whose money is invested in the fund. What do investors like his mother want?
“They want downside protection, but they also want to participate in the upside over the long run,” he says.
Two principles guide David Jane in the approach to managing his fund. “Firstly, don’t get hugely positively correlated strategies and call it diversification,” he says.
Secondly, be prepared to change your strategies, and radically if necessary. “You need genuinely diversified assets plus flexibility. And you cannot stand still. No standstill strategy can do anything but lose you money,” he says.
“Three years after launch, we have beaten cash, when all other asset classes (except emerging markets) have lost money. Flexibility has been the key.”
The manager believes the fund’s strong performance over the last year can be attributed to the construction of the portfolio.
He says: “Western markets continued to fall right through till March 2009, emerging markets – particularly the Asian markets – picked up a lot earlier.
“They found a floor around December 2008 and started to move up. We bought the emerging markets back then, having sold them very aggressively through the summer.”
Through the end of last year and into 2010 he started to tilt the portfolio into utilities, defensives and pharmaceuticals.
“Healthcare and utilities, for example, looked a much cheaper way of diversifying the portfolio than owning particular corporate bonds. So we have tilted the risk. On the fixed income side we had a huge emphasis on credit last year which was clearly the right decision.”
He has also tipped the balance positively towards Japan which he calls an “interesting market”.
“It is very cheap and was the big laggard last year, and yet it is hugely sensitive to a recovering world economy,” he says.
Instead of investing in corporates he now has credit in governments, including New Zealand, Brazil and Australia where the yields are higher than they are in the quantitative easing countries.
He believes because interest rate differentials are so low worldwide there is a significant risk of currency volatility.
Jane says he tries to mitigate currency risks to a high degree by hedging back to sterling because his clients spend sterling.
“I do not want to risk their money on something where I do not have a view. The only view I have got is currencies are going to be all over the place,” he says.
Jane ran a very low sterling weight around the turn of 2009 but in recent months has moved back into sterling fixed income.
He explains: “We have to own 30% fixed income. So we moved it back into sterling, particularly corporate bonds, high-yield bonds, and this gave us quite an attractive participation into the upside of the market.
“By the summer we started to get well ahead of our peers because our equity was good equity and we had more of it.”
Jane notes the average equity weight in the sector was around 40% to 45% in March when the market bottomed and it still remains around that figure today.
He says: “Now given markets are up 50% plus, most of our peers must have sold into the rise, and we just bought into it. We are an outlier in the way of construction today, and it worked well for us.
“We have been able to continue diversifying the fund and volatility has drifted up a bit higher but this is only to be expected.”
He points out the same funds which have participated in the rise have also participated most into the fall.
“So as a client what have I got from these funds? All I am doing is buying quite a high degree of equity beta. We did not fall as much as the peers on the way down, and we have risen as much as the peers on the way up.”
Jane believes “a huge proportion” of the UK retail market should be owning multi-asset cautious funds in order to mitigate volatility.
He says: “If you are trying to manage your asset allocation plainly most people would prefer a managed risk outcome than the volatility of owning any specific asset class.”
There is always going to be a lot of risk in the world, and there are always going to be a lot of clients who do not want to take the volatility that is betting on black.
“A single asset approach is not good, Investors need diversification and well managed asset allocation strategies and the standing still approach has not worked – it never has done and it never will do.”
