Every day, John Husselbee, known to many in the City as ‘Huss’, sits down with multi-asset co-head Paul Kim to discuss if their growth and inflation outlook has changed. These two factors drive their portfolio construction in a process Husselbee calls “the art of fund management”.
However, these tête-à-têtes rarely result in the pair making changes to their tactical allocation. Husselbee likes to keep turnover low, believing that buying assets and holding on to them for the long term is the key to successful investing.
He has invested with many of the managers in his £700m multi-asset range for decades, city titan Nick Train, for example.
Similarly, there are several funds that have stood the test of time despite management changes. One such fund is the £3.2bn Fidelity Special Situations, which he has held several times over the past 25 years, twice when Anthony Bolton was at the helm and now during Alex Wright’s turn as lead portfolio manager.
Seismic shifts in Husselbee’s portfolios are also rare because the strategic asset allocation, “the scientific side of the equation”, that forms the backbone of the 26-risk targeted portfolios in Husselbee’s multi-asset range, remains fairly static.
Using a screening tool that analyses historical returns, volatility and correlation between assets, head of risk Ed Catton ranks the overall market and 20 asset classes that form the investable universe from one to five, five being bullish.
This ranking is then used to construct growth, income and the low-cost, beta-dynamic portfolios with risk profiles ranging from one to 10.
Catton recently completed his annual review for 2018 but Husselbee and Kim are biding their time to find the cheapest deals.
The well-worn investment tenet of ‘buy low, sell high’ is more important than ever in a market that continues to look very overpriced, says Husselbee.
Playing catch-up
Right now, the team ranks European, Asian and emerging market equities between four and five in terms of attractiveness.
UK and US equities, meanwhile, are ranked at two, alongside developed market government debt, inflation-linked bonds, property and commodities.
That said, he admits he is becoming more interested in what is going on in the UK.
“The UK is a market that’s bright but has been neglected,” he says. “It has fallen from grace within the G7 and is clearly suffering from a lack of confidence, driven by the fact that everyone is feeling pessimistic about the Brexit negotiations.”
Like UK bulls Richard Buxton and Neil Woodford, Husselbee believes too much pessimism is baked into UK share prices, meaning that “any good news could see the UK play catch-up”.
“Some of the yields on stocks are at 4-4.5% in the UK, which sounds attractive to me.” Backing small- to mid-cap firms is his preferred way to play more expensive-looking markets such as the UK and US.
Small caps, which are given their own separate category in Catton’s ranking system, are viewed as one of the more attractive asset classes, ranked four. In Europe, Husselbee invests in the £2.3bn Baring European Select trust run by Nicholas Williams.
Hedge funds and absolute return strategies, which he has repeatedly criticised for failing to demonstrate value for money, are currently ranked four.
He invests in the H2O Multireturns Fund from Natixis-owned H2O Asset Management, arguing that as a global macro fund “it can do things we can’t”.
The fund has significantly outperformed its peers in the IA Targeted Absolute Return sector since launching in 2013, returning 33.6% over three years against the sector average of 5.2%.
The Pyford Global Total Return Fund is another holding in the multi-asset range. Its performance has been less consistent, lagging the sector over one year, -0.62% versus 1.74%, and beating peers over three years, 9.73% versus 6.01%.
“Returns in the sector can be pretty lumpy but when those lumpy returns come along they tend to be at different times to the equity cycle,” says Husselbee. “We’re not getting carried and investing 10% in these things.” The maximum he holds in any portfolio is up to 4%.
Husselbee will not invest in managers or active funds that do not have a track record of at least 10 years, which is one of the reasons he prefers tracker funds in emerging market debt. It is an area where he feels there isn’t a wide enough pool of mature active managers to choose from.
A question of consistency
Underperformance is the last reason Husselbee will sell out of a fund. In fact, he doesn’t believe there is such a thing as consistency of performance. He does, however, believe in consistency of style and approach, which is why new managers are a no-go.
“We don’t take risks on new managers,” he says. “What we are very conscious of is not undermining the whole process by taking managers who are not aligned to the market. Yes, we want stockpickers; yes, we want active managers. But if we don’t believe in consistency of performance we have to believe in consistency of style.”
A good active manager will typically outperform six out of 10 calendar years, according to Husselbee. “The big challenge is finding out when those six years of outperformance are because they don’t all come along in a nice straight pattern. That’s driven by investment style – value versus growth or small cap versus large cap.”
Managers such as Train and Wright have both “been around a while and made mistakes but they have settled on an approach and style that they believe works”.
“At different points of the cycle you will see them outperforming and underperforming. Over a 10-year period I’m pretty sure that both will outperform, but I’m equally sure both of them will do it in different ways and that’s what we’re looking for.”
Though adjustments to the strategic asset allocation are carefully calculated and usually subtle, there are changes.
As markets charged off in 2017, the lowrisk strategic asset allocation to equities changed significantly, rising by 10 percentage points from 27.5% to 37.5%.
For 2018, equities exposure in low risk is up marginally to 38.75%, while bonds have dropped from 60.5% to 59.25%.
Medium and high-risk equity allocations have remained static year on year at 80% and 98%, respectively.
But from a tactical perspective, Husselbee and Kim have introduced a slight value tilt, gradually selling down their growth positions from December into the first quarter.
Growth stocks have outperformed value stocks during the past decade, with the MSCI World Growth Index returning 171% versus the 110% of the MSCI World Value.
There has been renewed talk of value-style investing making a comeback, with more investors beefing up their cyclical stocks and managers, like Jupiter’s Ben Whitmore bringing new value funds to market.
By February, Husselbee and Kim had a 60%/40% value/growth split, which led to them selling down their position in the UBS US Growth Fund and upping their stake in JP Morgan US Equity Income.
In Europe, he has cut holdings in Alexander Darwall’s £5.2bn Jupiter European Fund in favour of Paul Wild’s £2bn JOHCM Continental European. In Japan, he has swapped out some of his position in the £2.5bn Baillie Gifford Japan Fund to buy more of the £2.4bn Man GLG Japan Core Alpha.
Running your own race
Husselbee regards the value tilt as a contrarian play but says, like Olympic gold athlete Mo Farah, he has the patience to run his own race, knowing that his strategy will carry him to the finish line.
“If you’ve got the fastest time in the 10,000 metres, you know how you’re going to win your race. If someone goes tearing off too early, good luck to them, because you know they’ve never run that fast before in their life and they’re not going to keep it up.”
Bleak headlines about Brexit and rising geopolitical tensions abound but Husselbee says the only macro factors that could prompt him to change course abruptly right now are the three ‘c’s: central banks, China and commodities.
While “all three blow up from time to time”, Husselbee views none of the factors as major problems at present.
“Inflation is not a problem in the UK, nor is it around the world,” he says. “You’ve got wage inflation that will start to pick up particularly now we have got synchronised global growth.”
Similarly, China is not slowing down anytime soon, he thinks.
“The transition from an export-led to a consumer-led economy is never going to be easy but when you’re on the ground, it doesn’t feel like anything is about to grind to a halt.”
While the oil price has risen sharply on the news that president Trump has pulled out of the Iran nuclear deal, Husselbee believes the effects are temporary.
He says: “It’s still supply and demand that drives the oil price, and Opec seems to be a little bit more in the driver seat than perhaps they were before.
“I don’t think it is in anyone’s interest for the oil price to fall out of that $60-80 zone. I would be more alarmed if we moved back to $120.”
