None of these funds are that large, the biggest being the Franklin fund at £260m, but all have relatively high tracking errors to the IA UK All Companies sector, and very good long-term track records.
Stock specific
We remain more positive on UK equities than any other asset class but we are also looking to increase our weightings towards funds that can, and will, go short. We feel it will be key to be extremely stock specific, hence our preference for active managers.
We do not see the coming period as being favourable for funds capturing the majority of their returns from beta. In fact, although historically our performance has come from high-alpha managers, we will be looking to further dial down our beta component.
At the same time, our only US exposure comes through global funds. This is a position we would expect to be maintained until there is some kind of recalibration of US markets, either by the earnings increasing or valuations falling.
There is some benefit to the extra level of opportunity brought by geographical allocation and stock selection, but only from managers who actually use it. We like Ardevora Global Equity Fund in this space. It is high conviction, long/short and, more importantly, it is successful.
With fixed income markets in completely unknown territory thanks to quantitative easing, we continue to favour actively strategic managers, shorter-term bonds and inflation-linked corporates.
We were too early in buying inflation protection but that, of course, is with the benefit of hindsight. The world is trying its level best to create growth, and with it inflation. If it fails then it would be game over for economics as we know it.
We still believe that the world will finally manage to create growth and the inflation risks are to the upside. As political uncertainty increases, no stone will be left unturned, if for no other reason than because it is in every politician’s own best interests.
In summary, we see opportunity but on an extremely selective basis. And with the backdrop of a rapidly changing European political landscape, we see the UK doing OK from here, whatever happens.