John Stopford talks to Lindsay Williams following the Fund receiving the Raging Bull Award* for the Best (FCSA-Approved) Offshore Global Asset Allocation Fund on a Risk Adjusted Basis.
Lindsay Williams: The gentleman on the telephone with me now won the Raging Bull Award for the Best Offshore Global Asset Allocation Fund on a risk-adjusted basis for the Global Multi-Asset Income Fund. It is John Stopford, who is Head of Multi-Asset Income at Investec Asset Management in London. John, congratulations first of all. Perhaps you could tell us how you beat off the opposition in 2018 and what your fund’s philosophy is.
John Stopford: Thanks very much, Lindsay. Well, we are looking to try and deliver a defensive total return but, for us, being defensive is not just about delivering positive returns. It is also about protecting the downside and I think that was a particular element that was important in 2018. So we had a lot of market volatility. We participated in market upside when it was there but I think we protected better to the downside.
Lindsay Williams: Yes and there were periods of bullishness at various times in 2018 across lots of different markets and also periods of quite depressing negativity as well. So how nimble did you have to be in order to initiate, for example, a defensive strategy when things were not quite going as well as planned?
John Stopford: Well, one of the things I think we were helped by was, first of all, we were gradually reducing risk through the year on the basis that the markets were starting to look pretty fully valued, monetary policy was being tightened, growth risks were building, trade concerns and so on.
So we were incrementally more defensive but, on top of that, I think we had thought about what would provide protection in the portfolio and I think the thing that caught a lot of people out last year is, yes, equities went down but so did bonds and historically people have relied on bonds to provide diversification. I think the thing we felt was in a world where the Fed, in particular, were removing monetary policy support, yes, that was bad news for equities but it also wasn’t very helpful to the bond market.
So we looked for protection elsewhere and the main thing that we did was we used futures and options in equity. You can protect the downside in equities by selling futures and you can still capture the upside by buying options and, despite all the uncertainty, option pricing remained very cheap last year.
Lindsay Williams: Talking about the juxtaposition between equities and bonds, you say the fund benefitted from security selection within both equities and bonds. Was there any particular strategy or anything in particular that you did that really pleased you?
John Stopford: Well, I think, in terms of bond markets, just recognising that owning some of the big markets like the US and Europe wasn’t going to be particularly helpful in that environment (Europe being pretty expensive and the US selling off as the Fed raised rates) but other markets like Australia and New Zealand, where you had real yields, decent positive yields but also central banks becoming incrementally more cautious as growth was weak and inflation was low, those markets did pretty well. So even though overall bond yields rise, they didn’t rise everywhere.
By being selective, I think you are able to find opportunities even in difficult markets and, within equities, I think looking for stocks that had more resilient cash flows, so more sustainable businesses, less volatile businesses that actually outperformed on the downside, was also pretty helpful.
Lindsay Williams: It seems to me as though December is a bad dream that has gone away, went away very quickly and January has started off rather well. As we go into February, it looks a completely different position to Q4 of 2018. Are you cautious about this new-found optimism across asset classes?
John Stopford: I think the market is incrementally pricing in better news and the main news I think that has improved is the Fed is stepping away from a hawkish bias and becoming more data- and market-dependent but, having said that, it is a bit of a circular argument. If the market recovers and growth stabilises, the Fed are going to start tightening again and the only reason they are going to reverse course I think is if markets are weaker and the economy is weaker.
So I am not sure it is necessarily very helpful for anything other than market volatility. It does potentially remove some of the tail risks for equity markets but at this stage in the cycle, with earnings growth under pressure, with economic growth under pressure, I think we are a bit more cautious not to chase this rally and to look for opportunities to sell into strength and possibly then add back into weakness.
Lindsay Williams: Okay. You have hinted at how you are positioned. Can you give us more detail of your current positioning?
John Stopford: Yeah. So our effective equity position at the moment is pretty low. It is in the sort of low teens. So the range historically has probably been as low as 5% and as high as about 35%, so we are sort of towards the lower end of the range.
We are actually adding a bit of duration now. So the big thing that has changed is the Fed are becoming more data-dependent so, if things get worse, bonds probably will then start to act as more of a defensive asset again because the Fed can cut interest rates.
We are also becoming a bit more cautious on the dollar. I think that is another consequence. If the Fed are close to the peak in the rates cycle, it has been growth and policy divergence that has driven the dollar higher. So that is better I think for other currencies, potentially some of the higher carry currencies like emerging markets.
So we have added a little bit there but overall we are always going to be somewhat defensive because that is our mandate. We are looking to deliver steady returns rather than spectacular returns and predominantly looking for that return to be driven by income rather than capital growth.
So, inevitably, we have got a reasonable amount of fixed income but we are looking for individual security opportunities and trying to build a portfolio that is resilient to change and at the moment there is a lot of change going on.
Lindsay Williams: There certainly is. One thing that is guaranteed in 2019 is constant change. John Stopford, thank you very much for your time. John Stopford is the Head of Multi-Asset Income. We have been talking about the Raging Bull Award he has recently won for the Best Offshore Global Asset Allocation Fund on a risk-adjusted basis for the Global Multi-Asset Income Fund.
*The full details and basis of the award, affirmed on 30.01.19 are available on request.
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