When Schroders launched its ISF Global Multi-Asset Income Fund just under two years ago, with the largest amount the firm has ever seeded for a single fund, £50m, it certainly raised expectations.
Fast forward to this month, and funds under management during this short space of time have grown to $4.1bn (£2.5bn) in the hands of Aymeric Forest, who was personally responsible for setting the portfolio up from scratch in April 2012.
This Luxembourg SICAV with 32 share classes is sold in Asia, the Americas, the Middle East, South Africa and Europe, driven by the demand, as Forest sees it, from investors across the world for a common investment vehicle that can offer a reasonable level of income without too much risk.
The risk factor
“The risk is lower because the biggest contribution comes from dividends and coupons, which are by nature less volatile than capital appreciation,” he says.
The 5% yield objective has drawn in many investors, typically through distribution platforms, who might have previously used bonds for core exposure, and Forest says institutional clients such as insurance companies and charities are interested in the risk-return profile of the fund.
He says the fund is unconstrained, outcome-orientated and with a moderate level of risk made possible through a high level of diversification, a global approach and a large investment universe. The maximum exposure of any company share is 1.5% and for bonds, although a little more relaxed, is unlikely to be more than 1%.
To overcome different types of risk, for example in relation to currency movements, equity market falls or bond-duration gyrations, he uses derivatives products to hedge parts of the portfolio and smooth the goal of achieving a sustainable income.
Forest’s approach is informed by his background, which is a strongly European one, having studied in Germany, Sweden and France, and then gone on to work in Luxembourg, France, Spain and, most recently, the UK.
Before joining Schroders, he headed a multi-asset operation at Spanish banking group BBVA in Madrid during a difficult period when the bank was in the middle of a deposit war.
“[BBVA] was also exposed to bad loans with the collapse of the property market and the increasing unemployment rate, so it did give a different perspective.
“A Spanish pension fund historically had a large exposure in Spanish bonds, so the first thing I did when I joined was to ensure sufficient diversification, instead of just concentrating on domestic bonds.
“Even when the environment seems to be positive, you can’t afford to be complacent. You have to assess the value of the securities you buy or sell. One thing I’ve learnt definitively is that you shouldn’t compromise the quality or value just for yield level or to follow the crowd.”
Stand out from the crowd
Forest contrasts his approach with competitors who he says tend to take more risk in order to get more growth and a higher yield.
“We have a moderate risk profile and we are truly flexible”, he says, citing an example in January when the fund completely exited US investment-grade bonds as the spreads were not offsetting the credit and duration risk enough to be attractive.
Instead, he switched to European investment-grade bonds and opportunistically bought some dollar-denominated emerging market bonds.
“We have a quality bias not only in our stock selection, where we ensure the sustainability of the dividend payment is high, but also on the bond side where we limit our exposure to triple-C bonds to 5%, and this is to ensure there is sufficient liquidity.
“Some competitors go in search for yield in illiquid stocks that are easy to buy but difficult to sell.”
As for alternative investments, Forest continues to invest in infrastructure or commercial property, but he will not buy if those instruments are at a premium to their net asset value.
The biggest sector exposure in the fund is for energy, which has gradually increased over the past three months both for equities and fixed income. Energy stocks have started to offer value after suffering falls during the past year, and are seen by Forest as great cash generators. Exposure to the IT sector has also grown over the past six months.
“Quite often when people think about IT they think about companies that don’t produce dividends, but actually we have a lot of mature, big cash generating IT companies – not only Microsoft or IBM, but even Apple – which are all paying dividends.”
A sector the fund has avoided heavily is utilities throughout the world. Forest says this is due to the sustainability of some of the business models and a sensitivity to bond yields.
Within bonds, a sector he has favoured over the past three months is telecoms, which has been notable for some good merger and acquisition deals, and he remains positive on the outlook for telecoms, especially in Europe.
Country weightings
Geographically, his preference at the moment is for the US and Europe.
“Europe was top of the list over the second half of last year, and we started to reduce the exposure there in favour of the US more recently, as European valuations started to appreciate again.”
For emerging markets, equity futures have been used to hedge the market and the currency risk is also hedged 100% .
“When we believe the risk will diminish we will remove some of this protection,” he says.
The tiny 1.8% weighting in Japan is explained by the low yields offered by bonds there and the relatively few opportunities to invest in companies that are growing their dividends. One and a half years ago, says Forest, exposure to Japan was increased to about 5% of the fund, mainly through companies that were growing their dividends at a pace of 25%.
“They were very cheap in 2012. We focused on some neglected areas such as small caps but as they appreciated, the yields started to drop and became less attractive.”
With a correction to the Japanese market happening over the past month, the couple of large companies in the telecom sector in which the fund already has shares, and which offer a 3-3.5% yield, have become more attractive and may be added to. However, Forest says: “It’s never going to be dominant in the portfolio given the nature of our product.”
Equity portion
As for the total exposure of the portfolio to equities, the trend has been downward from the end of December, when it stood at 40%.
At the beginning of January, this was reduced through the addition of protection in the form of some ‘put’ spreads as well as by removing an element of futures exposure to equities.
Forest says this resulted in the equity portion falling to around 32%.
“The rationale was associated with the strong rally we saw in equities in December, so there was profit-taking.
“Then the volatility associated with the sell-off of emerging market currency increased, and in this context we were relatively glad to have a bit of protection. It did not stop the fund delivering a negative return in January but at least it helped limit it.”
Equities still remain Forest’s favourite asset class for the year but, in common with many fund managers, the expectation is of more volatility given that the support of central banks is declining.
He is also concerned that investor expectations have risen greatly, and therefore the realisation of growth in order to match these expectations is very important.
“What is going to be critical going forward is that companies become confident again and start spending. To make growth sustainable over the long term, we still need more investment, so this is something we will keep an eye on.”
