Attracted by the promise of flexibility and a global role that would allow him to invest profitably throughout the cycle, Hector Kilpatrick made the leap from institutional, long-only
fund management into private client wealth management only five years ago.
And one can guess Cornelian Asset Management is happy he made the leap. Since joining the firm as head of the group’s global multi-asset investment team, the range of five risk-managed funds, only two of which were around before Kilpatrick joined, have grown assets to the point where they now account for about half of the firm’s assets under management – just north of £700m in total.
For Kilpatrick, the biggest difference between running long-only money for institutional clients and the Cornelian managed fund range is the global, multi-asset nature of the funds.
“We really can nuance the risk adjustment to try to capture as much of the upside with as little risk as possible. At the same time, we are able to diversify the portfolios when needed to try and protect gains and our investors, so that is really empowering,” he says.
And, while the funds have performed well – Managed Growth, for example, has returned 49% since launch – that ability to diversify and protect on the downside has seldom been as important, Kilpatrick says.
“The major asset classes are all performing pretty well, which would suggest investors think all is right with the world, but we are increasingly concerned about the outlook,” he says.
“If you look at equities specifically, valuations are high. They are not unprecedented but they are high, and chunky earnings downgrades are coming through. We are concerned investors are being too complacent, particularly because of macroeconomic developments in the US and China.”
US falters
In the US, he says, while people are not yet talking about the de-stocking cycle that is under way, it will be top of mind over the next few months.
“Inventories are rising, factory orders are lacklustre and capacity utilisation is beginning to roll over,” he says, which, when combined with the stronger dollar that is affecting the competitiveness of US manufacturing, is a compelling argument for his belief that end demand in the US is not as strong as people think.
The other issue facing the US that gives Kilpatrick pause is the flat performance of the US housing sector.
“The US housing market has largely flatlined since 2013, despite some job growth. This suggests that, while the highest paid in the US are getting pay rises, the vast majority are seeing negative real wage growth,” he says. This will result in weaker activity than is
expected at this point in the cycle.
China concerns
Kilpatrick’s concerns about China centre around its ability to export deflation.
“China has grown its total debt roughly four times since 2007, and it is quite clear that growth in economic activity has declined sharply, and with it momentum,” he says.
“This explains why the Chinese authorities are in stimulation mode. But we think they will have to devalue their currency to regain their competitiveness in the world, which could export further deflation across the globe.”
And, while he does not believe this scenario is imminent, he does see it as a requirement from a Chinese perspective and as a concern for the global economy.
As a result of these concerns, the firm has been taking risk off the table across the managed fund range.
Between the third quarter of 2014 and now, the firm has taken about 15 percentage points of equity risk out and split that between short-dated gilts and US treasuries (8%), absolute return (4%) and the remainder in cash. In the absolute return space, Kilpatrick says he particularly likes the Jupiter Absolute Return Fund.
