Iain Cunningham talks to Lindsay Williams to mark the 10-year anniversary of the Multi-Asset Protector strategy.
Lindsay Williams: With me is Iain Cunningham, Multi-Asset Fund Manager at Investec Asset Management in London. We are talking about the 10 year anniversary of the Investec Multi-Asset Protector strategy. MAP (as it is called) is one of only a handful of protected funds still standing. Why is that? We are going to find out right now with Iain. First of all, for people that are not familiar with the concept, what is a protected fund?
Iain Cunningham: A protected fund in the context of MAP and, more broadly, is a fund that is seeking to generate a degree of growth through time, so growing invested capital whilst also offering a degree of protection and the majority of the funds seek to protect a minimum level of capital within the portfolio. So, from the perspective of our Multi-Asset Protector strategy, we are seeking to protect at least 80% of an investor’s initial investment.
Lindsay Williams: It sounds like a compelling argument and yet it seems to be out of favour because of the closure of the sector. Are they just simply no longer in demand or is this a result of protected funds not delivering what they intended to set out to deliver (if you see what I mean).
Iain Cunningham: It is a combination of both those factors ultimately. So I think primarily it has been driven by the fact that a lot of funds in this space historically have failed to deliver more consistently for clients. Many of the protected funds have ended up being cash-locked in more volatile markets and this has been a result of them generally being sort of passive underlying portfolios that often run a risk level that is too high compared to the protection objectives and similarly what we have seen is many protected portfolios, in the way that they are managed from a more passive perspective, is they will naturally be selling if markets go down and then trying to buy back into markets when they are rising and, with time, this naturally weighs on returns.
Then, as you have mentioned, I think generally the market environment we have seen a significant bull market, particularly in US and global equities through much of this cycle and, as a functions of that, it has no doubt reduced investor demand for protected strategies, obviously in relative stability within financial markets. .
Lindsay Williams: So what I glean from that as a layman is that during a bull market the protected strategy, the protected funds are not as attractive because they do protect to the downside and the downside has been limited.
Iain Cunningham: Yes, that would be fair to say.
Lindsay Williams: Can you outline what the Investec Asset Management MAP is aiming to achieve and has aimed to achieve and has it done it? The fact that you are still around tends to tell me that you are still delivering.
Iain Cunningham: Yes, at a high level. The Multi-Asset Protector strategy at Investec is a moderate risk multi-asset strategy. It is investing globally on an unconstrained basis across asset classes and it is aiming to deliver in excess of 5% per annum whilst seeking to protect at least 80% of an investor’s capital.
Now the thing that makes the strategy unique is that whilst many peers in this space have historically placed a disproportionate emphasis on the protection aspects of the portfolio and generally have quite simple underlying passive investment portfolios, we tend to place much more emphasis on getting the portfolio or the return engine right because our belief is, if we can get the return engine right, then we are less likely to engage derisking mechanisms.
I think within that the key differentiator in terms of the way the portfolio is managed is ultimately active management, sort of seeking to deliver returns through active security selection and active asset allocation and then we utilise three layers of protection. The first and most important layer of protection, which is very different to most funds in this space, is active management and that is us employing a counter-cyclical asset allocation approach so that we slow the portfolio down and reduce risk when we see bumps in the road ahead.
Then the second layer of protection that we utilise is a derisking mechanism or automatic braking system where, if we don’t slow things down sufficiently and the fund’s price starts to fall, the fund will automatically see its allocation to cash begin to rise.
Then the third layer of the protection that we utilise is what we term an inbuilt airbag solution, which is, if you have an extraordinary event occur in markets, making the fund decline by more than 20% from its peak, the strategy has a protection contract written with a third party that would make it pay out to return the fund to 20% from its peak to ensure that the 80% objective is met.
Lindsay Williams: It’s fascinating – active management, inbuilt derisking mechanism and protection contract. How many times has the protection contract aspect of MAP been utilised? Probably not that much over the last 8 or 9 years.
Iain Cunningham: No, so the protection contract has not been utilised. The predominant focus is, as you said, primarily active management, which is always ongoing within the portfolio and then there have been a couple of instances in 2011 and then late 2015, 2016 where the second layer of protection of derisking mechanism was utilised but that mechanism wasn’t utilised through the volatility we have seen over the past year.
Lindsay Williams: Just give us an example of when active management has worked. I mean you talked about those three pillars. The protection side of it has not come into play, as you have just described, but what about active management? Presumably that is far more a part of the strategy during the last 8 or 9 years, as I have said.
Iain Cunningham: I think the best example is probably the most recent example and that would be through 2018. So I think obviously markets were volatile across the past 12 months. In particular, I think when we entered 2018 there were a number of signs that were flagging that showed that there were certain aspects of euphoria taking place in financial markets. We had elevated valuations. Investor sentiment was very elevated. People were obsessing over things like cryptocurrencies, anything relating to automation and robotics and generally risk appeared quite low from a fundamental or economic perspective.
However, based on our experience of managing these types of strategies within markets, we know that these environments can actually tend to be moments of heightened financial market risk and, given our counter-cyclical approach to asset allocation, we were pre-emptively reducing exposure to both equity markets and credit markets at the beginning of 2018 and holding a large balance in cash. So as we saw global equity markets fall over 20% from their peak to trough through 2018, the fund wasn’t required to use its inbuilt derisking mechanism, which is the second layer of protection, because it was already very defensively positioned.
Lindsay Williams: Given the long in the tooth nature of the equity bull market being threatened in 2018 to scupper it or rather investment or rather market participants threatened to scupper the big long-term bull market but we have had this V-shaped recovery, nonetheless it is still long in the tooth. Do you think it is time now, on the 10 year anniversary or the Investec Multi-Asset Protector strategy, for investors to look at it even more closely?
Iain Cunningham: So I think the way that we have termed the environment as we look forward is certainly one where many of the big tailwinds that we have seen driving this bull market are evolving into more headwinds. We have seen many, many years of fairly low interest rates and lots of money-printing, which has inflated asset prices, and now we have seen the opposite last year, which caused a lot of volatility and we think in the near-term we are unlikely to go back to an environment where there is more sort of quantitative easing taking place. You still have central banks generally looking to exit out of very extraordinary monetary policy.
So I think as a function of those changes in dynamics, we are likely to see it a little bumpier so we are likely to see a high degree of volatility and therefore at this point, particularly as we move towards the end of the US economic cycle where we would naturally get more volatility as well, we think it is probably an appropriate time for investors to be thinking about somewhat more cautious strategies that can offer a degree of protection or a smoother ride through time.
Lindsay Williams: Iain, thanks very much for your insight and again many congratulations on the occasion of the 10 year anniversary of the Investec Multi-Asset Protector strategy. That is Iain Cunningham, Multi-Asset Fund Manager at Investec Asset Management in London.