Archives for November 2016

Brexit with Trump

Just six months ago, the probability of victory for each of Brexit and Trump were 30% – and the odds on the double were thus 10-1 against. The world going into 2017 looks a very different and more uncertain place than it did a year ago.

However, Trump’s victory provides the UK with an opportunity to gain a substantially better agreement with the EU than it would have done with a Clinton victory, even though Mrs. Clinton may well have leaned on the EU countries to give the UK a sensible deal.

Trump’s victory has many European governments feeling considerably less secure. With his outspoken admiration of Vladimir Putin and his tendency to see foreign relations as a zero-sum game rather than mutual gains through international agreements, Trump’s view of NATO and European security is very different from his predecessors. For those in Eastern Europe, Putin is today a bigger threat to their borders and US military support less likely to be forthcoming.

One of the few cards that the UK holds in the Brexit negotiations is it deep and unwavering commitment to the military defence of its European allies, and despite the harsh words used against the rest of the EU from those seeking to leave the EU, their military support for the EU has not changed and they have consistently voiced this before, during and since the referendum. That support has now become much more meaningful and valuable, especially to those countries in the former Eastern Europe. 

The desire to punish the UK for its audacity to leave the EU is now (post Trump) more likely to be to seek a strong agreement with a staunch ally who is also a nuclear power. On the Maslovian hierarchy of needs, the basic security of your country is a far more powerful force than the continued existence of a financial passporting system or some controls on the uninhibited movement of people between countries.

In addition, once again, through their votes, the UK and the US have shown the similarity of their thought processes (a clear parallel being  the ascensions of Thatcher and then Reagan), which often baffle European minds.  Maintaining a close and friendly relationship with the UK is likely to be helpful to Europeans in understanding and interpreting the actions of the US. Trump has spent time in the UK (though mostly in Scotland), has openly identified his success with Brexit and did

promise to put the UK at the front of the queue for a trade agreement post-Brexit, following Obama’s threat that it would be at the back of the queue. Though of course this would be strictly on Trump’s terms, and have almost no cost to US jobs – it would enable him to show that there are some trade deals he will do if they are right for the US. The EU-US trade deal, already stymied by European doubts before Trump’s  success is now dead in the water.

Trump’s victory will change the world in many ways, but one of the more surprising ones is likely to be that the UK obtains a better exit agreement from the EU than would have occurred without Trump.

The giants of Multi-Asset Absolute Return fund sector

This was originally published in Investment Week

In recent years, the fund sub-sector seeing the greatest inflows has been the Multi-Asset Absolute Return sector, home to several of the largest individual UK funds. The attraction to investors of these funds has been the promise of returns well above cash for limited amounts of volatility, and sophisticated investment processes aiming to exploit opportunities across all asset classes. The giants of the sector are shown in the table.

AuM £m Fund 1 yr ret % 3 yr ret % 5 yr

ret %

Launch date
26,560 SLI GARS -2.4 7.7 23.2 29/01/08
9,824 Newton Real Return 11.2 15.8 28.4 01/04/04
7,197 IP Glob Target Return 3.0 16.2 na 09/09/13
2,562 AIMS Target Return -0.4 na na 01/07/14
1,571 AIMS Target Income 2.6 na na 30/11/14

Source: IW 10/10/16, fund factsheets

Funds such as Fulcrum Diversified Absolute Return and Goldman Sachs Global Absolute Return have similar objectives and approaches but have not yet seen investor flows to the same extent.

All of Newton, SLI and IP have, to date, broadly achieved their return and risk objectives over the recent 3 or 5 year horizons, but it is noticeable that none of these funds have generated much performance from the large decline in sterling post-Brexit (Newton have held a relatively high sterling weight in recent months.  This is in stark contrast to most of the more traditional fund sectors where beta returns predominate, which have been significant beneficiaries of sterling’s fall.

Hindsight shows that, once again, where funds flow from investors is heavily focussed in one sector, that sector tends to lag in performance behind less-favoured sectors.

Newton Real Return is the Grandfather of the sector, launched over 12 years ago, aiming at long term returns of cash +4% before fees over rolling 5 year periods and positive returns over rolling 3 year periods. They aim to achieve this by investing predominately in equity and bond markets, and control net market exposures through active hedging of equity and currency market risk. It can be best seen as a balanced fund that actively hedges its total equity exposure. Iain Stewart has been in charge since the fund’s launch and has delivered a positive return in every calendar year to date. This was particularly noteworthy in 2008 when the portfolio was well prepared for collapse in equity markets, but performance was disappointing in the 2012 to 2015 period when he held a relatively cautious view on equity markets. However, the last 12 months have returned 11.2% as the exposures to long duration government bonds and to gold have paid off handsomely, in addition to strong equity sector selection performance. This recent good performance has more than recovered the prior lagging performance, whilst maintaining low volatility.

SLI Global Absolute Return Strategies is the Big Daddy of the sector, the largest fund in the entire UK funds market, launched in early 2008, aiming at returns of cash +5% before fees over rolling 3 year periods. It uses a combination of traditional assets such as equities and bonds and modern strategies that make use of advanced derivative techniques, which give access to other asset classes such as interest rates, volatility and inflation. These techniques mean that the gross positioning of the fund has often exceeded 400%, though the rigorous risk control measures have meant limited portfolio volatility over the life of the fund. It is most easily understood as a hedge fund, though without the performance fees. The portfolio consists of around 40 different “ideas” which are each expected to deliver positive returns on a 3-year view, which are then blended together. For an advisor or end-investor it does mean that it is difficult to understand how the fund is actually invested in contrast to the far more straightforward portfolio positioning used and reported by Newton.

An otherwise very steady performance record has been damaged by the fund’s struggles over the last year, with a loss of 2.4% over that period. The team have struggled with their key long term market view of a stronger US economy, and this view was reflected in many of their positions, in particular their short duration position in US bonds, the significant long position in the dollar and a US Banks v Consumer Staples equity position. Some fund research houses also have cited the sheer volume of assets now managed by the GARS team (over £150bn) as a possible factor behind its declining performance in recent times.

Invesco Perpetual Global Targeted Returns is more like the oldest son in the sector. It was launched when three of the GARS investment team left SLI to move to Invesco Perpetual in 2013 and it adopts a similar investment process, though tends to operate with fewer individual ideas at any one time. Like GARS its gross positioning is substantial and makes considerable use of complex derivative techniques and aims to generate a positive return of cash +5% before fees over rolling 3 year periods with less than the volatility of global equities.  One difference in approach is that many of the talented equity managers at Invesco, such as Mark Burnett, manage equity “sleeves” for the GTR team thereby adding an extra element of return from individual stock selection that has absent at SLI.

AIMS Target Return and Target Income are the younger son and daughter of this family. Target Return was launched in July 2014 and Target Income in November 2014. Euan Munroe who built the original GARS fund is now CEO of Aviva Investors and the whole of their business is now centred around providing ideas for the multi-strategy fund range. The Target Return fund, like the others in the sector seeks positive gross annual returns of cash + 5% over rolling 3 year periods. In its objectives and approach the fund is similar to the SLI and IP offerings.

The Target Income fund, unique within the sector, seeks a pre-tax income return of cash +4% pa paid monthly, whilst maintaining the capital value after fees, regardless of market performance. In order to generate the high level of income targeted, a large part of the portfolio has to be invested in high-yielding equities and in bond markets, typically taking on some credit risk. Market hedging, multi-asset ideas and techniques are then added to the portfolio in order to seek to produce an absolute return profile.

Neither fund has yet built a 3-year track record – both performed well from launch until April 2015, but have struggled to make further gains since then.