While some wealth managers fret over the fate of the FTSE, it’s the non-equity part of portfolios that represents the biggest challenge for Dart Capital.
With cautious and balanced mandates across the industry tasked with holding up to 65% outside of shares, there are some tough calls to be made by any investors concerned about bond valuations.
Having held a sizeable proportion in short-dated bonds across its five strategies, the investment team at Dart Capital – led by chief executive Richard Whitehead – is presently looking for opportunities outside of “bubble territory”.
“What opportunities are out there which are lowly correlated with equities?” Whitehead asks.
“We’ve really struggled with that in the past 12 months because there are many things you can invest in, but
a lot of them have similar characteristics to equities.”
Post-credit crisis, dealing with intra-asset class correlation is where good investment managers earn their fee, and it is a full-time job.
A risk-based approach
Dart Capital has existed as a financial planning business for more than 20 years, with its primary focus moving towards investment management when Whitehead joined from Coutts in 2004. A subsequent management buyout of the business by Whitehead and co-principal and operations director Matthew Wille in 2008 set the ball rolling for bringing in discretionary commissions.
The pair stress that their approach is risk-based in the sense they prioritise looking at beta as much as they do volatility. An investment strategy committee meets once a month to tweak tactical asset allocation across cash, fixed interest, equities, commercial property and alternatives.
“If you’ve agreed to a mandate of 50% in equities, then clearly you expect that there will be a risk balance to that,” adds Whitehead.
“That’s our challenge at any given time on the rest of that portfolio. You don’t want beta creeping up because we’re adding other things that really are equities within the other 50%. Part of the controls within the investment strategy committee are challenging ourselves over things like commodities – are they really a diversifier or not? How do you access that commodities theme in a world of inflation without actually adding to beta? Last year, the commodity market at various points had quite high correlation with equity performance.”
At any time, the team considers several macro themes running within the portfolios – both potential opportunities and potential threats.
The newest is that 2013 may be a year of growing inflationary concern on the back of years of QE stimulus. This is something that could have a significant impact on the growth and yield prospects for fixed income, though latest statistics from the IMA have shown significant moving of retail client money out of corporate bond funds and back into risk assets.
“In a risk on environment, yields from bonds and gilts have unsurprisingly become less attractive as equities rally,” says Wille.
“If confidence increases, particularly in the US, then there has to be a point at which the Fed looks at its interest rate policy and asks if it really needs to be at such low levels all the way through to 2015? That yield curve could impact proportionately on investor appetite towards non-cash – the high risk bond market in particular.”
Dart Capital’s short-dated exposure includes investments in dedicated funds from Threadneedle, Smith & Williamson, as well as the Aberdeen Asian Local Currency Short Duration Bond Fund. A recent addition is the West LB Euro Credit Short Duration Credit Fund for added diversification.
Tough decisions
Fund selection is looked after by another committee, which meets separately from the investment committee meeting. As well as open-ended funds, the team is also happy to use ETFs, though there is minimal use of investment trusts at present.
In line with its focus on beta performance, the team is not afraid to make big decisions on big name fund managers if they are not delivering real value. For example, within UK equities, Tom Dobell’s M&G Recovery Fund has moved from a buy to a hold on the basis that at various points over the past two years it has performed like a tracker to the FTSE All-Share with a beta close to 1.
Dart Capital Key funds
Fund
UK equities
- Fidelity Moneybuilder Income
- Rathbone Income
- Threadneedle UK Equity Income
- Investec UK Special Sits US equities
- BNY Mellon US Equity
European equities
- Threadneedle European Select
Asia Pacific
- First State Asia Pacific Leaders
- Emerging market equities
- First State Global EM Leaders
Global equities
- BNY Mellon Long Term Global Equity
Fixed interest
- Aberdeen Asian Local Currency
- Short Duration Bond
- Threadneedle Short Dated Corp Bond
- Smith & Williamson Sht Dtd Corp Bnd
- West LB Euro Credit Sht Dur Credit
Property
- M&G Property Portfolio
Alternatives
- Eclectica Absolute Macro
- Absolute Insight UK Eq Mkt Neutral
- Old Mutual Global Eq Absolute Return
Source: Dart Capital
“If you look at the spread of stocks he’s buying, many are linked to the commodity super cycle and therefore have been the stocks that have largely added beta of 1.1 or 1.2 and haven’t delivered the results in the past 18 months that you would have expected that particular market to have generated,” explains Whitehead.
“Some of it is a quirk, but we do pay these guys to be good stockpickers and if they don’t deliver then our process means we have the opportunity to move them to a hold or ultimately sell them if that underperformance continues.”
Dart Capital prefers to have a yield-focused “defensive core” to its UK holdings, through the likes of Fidelity Moneybuilder Dividend Threadneedle UK Equity Income.
Turning to the US, money is split between an S&P 500 tracker and the BNY Mellon US Equity Fund, managed by Walter Scott & Partners from Edinburgh. The Brown Advisory American Fund is also used in certain strategies.
Threadneedle European Select is the main choice in Europe while the team are big backers of First State in Asia and emerging markets with Asia Pacific Leaders and Global Emerging Market Leaders.
Japan is an area where the managers have little conviction, as Whitehead explains: “We have only a 2.5% weighting to the third-largest economy in the world and I don’t think we are going to up that anytime soon. We want to see some genuine reforms and confidence in that market – you need to see a real culture shift, which might take a generation, before that market moves forward significantly.”
Keeping it simple
The managers are happy to use multi-strategy and long-short funds to capture returns during more volatile periods, though they acknowledge that many of these were not successful in the latter part of last year. Funds held include Jupiter Absolute Return Fund, Eclectica Absolute Macro and Old Mutual Global Equity Absolute Return.
One fund that Dart does not invest in is the £14bn Standard Life Global Absolute Return Strategies (GARS) Fund, believing that there are other less complicated ways of accessing some of the strategies that it employs.
“Sometimes simple is good; we are taking enough risk in equities, to overlay that with what is quite a substantial compliance risk that could be generated from something like GARS,” opines Whitehead.
“I’m always concerned when strategies get too big and there’s a lot of money chasing this fund from advisers who don’t necessarily have the same level of knowledge, intelligence and due diligence.”
Another alternative asset class is property, which Whitehead sees as a genuine diversifier away from equities and bonds, though only one investment is used – M&G Property Portfolio, a bricks and mortar fund managed by Fiona Rowley.
Still, the team remain cautious about leverage in this sector and, with emphasis again on a risk-based approach, they will review funds if they have climbed too much beyond expectations, whatever the asset class.
For example, towards the latter part of the last year they bought into Legg Mason Brandywine Global Bond Fund, but the concern is that it has already outperformed.
“It’s up 2.5% over the past month [to early January], and that is too much considering what we expect from the fund – it’s meant to be boring,” says Whitehead. “There’s an element of leaving the party at 11:30pm in everything we do,” offers Wille. “It’s about leaving something for the next guy.”
