There’s been a bit of activity recently in the Defensive and Income funds, and so here’s a few bullet points on the strategies added to the funds.
Defensive Assets Fund
The fund started the year with a big cash reserve of close to 20% and after the last of these changes complete this week there will be cash in the fund of just 3.5%. This also includes some tactical increase in the high yield holdings as spreads increased in January, and a reduction in the weight of the Dynamic Assets Fund.
- Addition of BlueCrest All Blue (Investment Trust) (5%)
- This change was completed in February and the attached note has been circulated.
- The fund has been added to generate significant, uncorrelated absolute returns.
- BlueCrest is a well known hedge fund group with a number of different hedge fund strategies managed. The All Blue fund is a multi strategy collection of six of those and we invest in the investment trust, a closed ended company that itself invests in the All Blue hedge fund.
- The strategies cover a range of styles but each aims for consistent returns in their own right. So the equity strategies tend to be macro (buying low and selling high), relative value (where one asset is preferred over another the preferred is purchased and the other asset is sold short – eg buy US Large Cap & sell Euro Small Cap), market neutral (simultaneous sales and purchase of very similar, but differently valued stocks – eg buy VW & sell Daimler), trend following (buying once a market is rallying based on a specific signal – eg buy copper once the spot price is above the 200 day moving average), or just low volatility in their own right (loan finance, fixed income).
- This change completed last week.
- The rationale is to hold an asset that pays good income but with no (or little) duration (and thus interest rate sensitivity), and also diversifies against other existing assets.
- The name refers to company debt whose coupon payment adjusts (or float) with interest rates. So unlike normal high yield bonds, these loans do not fall in capital value when rates increase. So the risk in the fund is limited to the credit risk of the underlying companies, or individual loans. The majority of the return is likely to come from the income paid on the debt (currently 4.12%), not capital growth.
- We have opportunistically purchased this at a time when the share price is close to the NAV – being an investment trust the purchase price can be at a premium or a discount to the actual net asset value. The fund has been trading a significant premium which made it a less attractive purchase, until recently, though it still remains an excellent investment.
- This is an illustration of our improving outlook on the economy – both increasing interest rates and reduced likelihood of company default.
- The fund uses a global opportunity set but has a US bias due to the size of the loan market there, but is hedged to remove currency risk.
- Addition of Neuberger Berman Short Duration High Yield Fund (UCITS Fund) (3%)
- The rationale for the addition is to generate a good return above cash but with a low duration (currently ~2years).
- The Russell analyst describes this as a “sleep at night” approach as there is a big focus on downside risk management.
- The fund is hedged to remove currency risk
Multi Asset Income Fund
Both the above Neuberger Berman Floating Rate Note Fund has been added to the fund for their ability to generate income but with low duration, and hence help to mitigate interest rate sensitivity of the fund.