Commodities exposure delivers for Armstrong as Distinction DRR outperforms peer group

After only a year since launch, former Insight manager Ana Armstrong has seen her IM Distinction Diversified Real Return (DRR) fund deliver stellar returns in the year since launch, outperforming its longer-established peers.

The fund returned 14.7% in the 12 months to mid-February, surpassing most of the 152 funds in the Cautious Managed sector, which returned an average of 9%, according to Morningstar, driven partly by its commodities exposure.

Armstrong said DRR also posted the highest Sharpe ratio in the sector at 2.5%, meaning – in terms of volatility – the fund has one of the best risk-adjusted return profiles.

Benchmark

Unlike many other funds though, DRR does not have a standard index benchmark.
Rather, the fund’s target is to return UK RPI inflation plus 4% per annum. “The objective is very important and this is where the fund differs,” said Armstrong. “Real return funds compare themselves to cash as a benchmark – which is 0.7%. If they outperform the cash benchmark, they do not even catch up with inflation, which is the biggest destructor of purchasing power in the world.”

Commodities success

The fund, which has £23m in assets, has around 30 positions and is run by Armstrong along with a team of quant analysts. Armstrong attributes the DRR’s success largely to commodities, with copper in particular providing a boon for performance. “We also held agricultural commodities, including wheat – it was a little unfortunate we exited wheat too early in September. We thought it had already appreciated and it was a good time to take profits, but after that, it appreciated quite significantly.”

Oil positions were also good performers, featuring in the top ten holdings at 2.8%. “We have a position further along the futures curve, because of the shape of it – it is more attractive to be long three months ahead, rather than the spot price.” She added tensions in the Middle East should continue to boost the oil price, along with long-term demographic issues in the region.

“If you look at the futures curve, first it is quite steep, then it flattens and then goes into backwardation, so if you buy near-term contracts it means you are losing money on the roll, because you are selling low, buying high. It changes shape from three months onwards, so for oil positions, that is a more optimal exposure.”

The fund applies a quant tool that analyses the impact of a position, before it is implemented, on the overall portfolio, looking at its contribution to risk, among other factors. This means the fund will never have a really large weight in one position relative to others.