PSigma Balanced Managed Fof head has negotiated the fund well through volatility
Tom Becket has just passed the first anniversary of managing the £6.5m PSigma Balanced Managed Funds of Funds.
Over one year to 28 September, the fund is ranked 12 out of 140 in the IMA Balanced Managed sector, climbing 11.9% against an average 5.5% increase, according to Morningstar.
What is your investment style?
Our investment philosophy is to protect capital in rough times and grow our client’s wealth in benign conditions. I would define my approach as balanced, diversified, but also pretty cautious.
What have been the key drivers of fund performance?
It has been a significant game of two halves. The first six months was broadly all about defence, so we had a lot of money invested in government bonds plus a significant cash weighting. There were periods until the middle of March this year when we used our entire 20% cash allocation.
There were also times during this period when we were more bullish on equities. We took our cash weighting down to 10% in December, hoping to play a Santa Claus rally, which paid off.
The last six months has been all about increasing risk and going on the attack. Although we have still been relatively cautious, certainly in comparison with our peer group, and probably more cautious than in hindsight we needed to be.
Outperformance has come from being nimble and flexible. We had 15% in government bonds and we have now taken that down to zero. We have been running at zero for about a month. Our biggest starting position was an 8% position in international government bonds, but we sold out of that completely at the beginning of January, thinking sterling was likely to rebound from low levels.
We have also benefited from being completely flexible in our approach to equity investing. We have oscillated from having bigger positions in UK and global. At the start of the fund’s launch, we had only 40% in equities – 25% global and 15% UK.
At the start of 2009, we turned this on its head and went to having much more in UK than in global. We have recently increased our equity weighting considerably to about 58%, and it is now much more equally weighted between global and UK.
What shifts have you made in portfolio holdings in recent months?
We have started investing back in commercial property for a number of reasons. Firstly, we think UK commercial real estate prices have bottomed, or are at least close to bottom. I personally believe if there is more downside, it is probably a maximum of 5% downside against a potential for 15%-20% capital appreciation over the next couple of years.
Our fund managers have also warmed towards commercial property because traditionally it is an asset-lagging class so it could be a decent recovery play, if it can follow the trajectory equity and corporate bonds have had over the last six months.
I have contacts within the industry who have highlighted the fact supply is very tight, and while interest has grown remarkably, there is still very little supply on the market, so an interesting balance could appear in the next couple of months that could drive upwards.
I think the yields are very attractive, certainly now by comparison with cash where returns are paltry. Our cash weighting in the fund is now only 2.5%-3% – we are managing it down.
We think commercial property is attractive relative to gilts and we actually sold out of our gilts about a month ago and regenerated the proceeds into commercial property.
I think also on a risk-reward basis – and on a yield basis – commercial property is much more attractive than investment grade corporate bonds, which again we have sold out of completely. You can probably get yields on UK commercial property on the prime stuff at about 7.5% against yields on corporate bonds, which are considerably less.
What investors seem to have forgotten in recent months is investment grades bonds will ultimately be priced off with government bonds. If we were to see a spike up in government bonds yields, which I think is very likely, people could nurse some serious losses holding investment grade corporate bonds. Also, if we are going to go into an inflationary environment – which we think is quite likely two or three years down the road – holding real assets in the form of commercial property is probably quite a sensible strategy.
What other sectors do you favour?
I still quite like resources as a long-term emerging market play and quite a decent inflation hedge within portfolios. The same thing would also go for gold. So I suppose by default the other two sectors I like particularly are equities, and within equities I am now much more selective than we have been over the last six months.
I think now is probably the time when high-quality international businesses with decent income streams, cashflows and high dividends will come to the fore. Certainly, these equities have lagged over the last six months, which to me seems unlikely to continue.
It is possible there could be a setback, although I think any setback in markets will be filled in quite quickly, i.e. people are likely to buy into the dips rather than sell the rallies.
Or, if we do not have a correction, what will most likely happen – and this is my central scenario – is the market rally will broaden out and start to incorporate those high-quality international businesses of a defensive nature, which have not partaken in the last six months.
So we have been putting new cash inflows into high-quality equity funds.
