Aberdeen Diversified Growth fund axes equities for emerging market debt

Aberdeen fund manager Tony Foster says things do not look the way they did a year ago as he shuns equities for less risky assets.

Returns on equities, which were sustained in 2016, will take a different shape this year, the manager of the £415m Diversified Growth fund argues as he looks to emerging market bonds for growth.

Foster has recently upped the allocation to emerging market debt by 5 per cent, bringing the allocation to around 16 per cent.

He boosted the allocation by taking resources from global equities in the portfolio, which currently make around 30 per cent.

He says: “We are looking at 5 per cent return on global equities for this year but there is better value most recently in emerging market debt. In equities, returns which peaked in the second half of last year are not as attractive now as they were then.”

New horizons

In emerging market debt, the multi-asset team focuses on local currency bonds which have over 7 per cent yield. Within the asset class, the fund has a mix of diversified bonds, mainly sovereign, and accesses different regions of emerging market economies.

Foster says: “We have a third in Latin America, a third in Russia and Turkey in Europe, and a third in Africa. We also invest in the recovery of Brazil and Russia because of the pick-up in commodity prices.”

The manager says India is also very attractive as a market as “what happens there is not linked to the US” and the economy is in better shape.

The fund accesses India through the Aberdeen Global Indian Bond fund which makes 2.9 per cent of the top 10 holdings.

Foster says: “If you think about it, during the financial crisis in 2008 emerging markets performed well as their economies were in better shape. At the moment, emerging markets are actually less indebted than many developed countries in terms of percentage of GDP.”

Humble beginnings

Foster is quite new to the Diversified Growth fund, having started managing it in 2015 after joining Aberdeen as part of the Scottish Widows Investment Partnership acquisition in 2013.

He started managing the fund with Mike Brooks who moved to Aberdeen from Baillie Gifford in 2015, bringing his investment process ideas with him. Brooks was fund manager and co-founder of a similar multi-asset fund, the Baillie Gifford Diversified Growth fund, which is now closed to new investors, having reached £6bn assets.

Foster says: “Mike’s philosophy was always about investing in a broad range of funds and asset classes to have a smoother turnover over time.”

The team managing the Aberdeen Diversified Growth fund has four staff and two analysts. They also manage the firm’s £19m Diversified Income fund.

Foster and the team also manage the Aberdeen Diversified Income and Growth trust which is the new trust born from the merger of BlackRock Income Strategies Trust with the Aberdeen UK Tracker Trust announced last year. The trust merger will go to a final shareholders approval vote this week.

The overall Aberdeen Specialists teams’ investment process and philosophy is the same for all the 150 to 200 equities they research and select from on a global basis, targeting 140 per cent of the index yield.

Directing traffic

The Diversified Growth fund has around 433 holdings and invests both in direct stocks and funds, mainly some of those managed by Aberdeen, as well as investment trusts.

With this large variety of holdings, Foster explains the fund is made of “naturally yield-generative assets” which avoid the need to “tweak the portfolio all the time”. He says: “In the asset allocation we use more of an incremental approach, rather than making too many changes. We look at a five-year time horizon and we are not tied to market timing.”

The sector mix combines infrastructure, aircraft leasing funds, global loans and asset-backed securities which normally tend to generate positive returns on the basis of a rising interest rates environment.

Around 7 per cent of the fund is invested in the Bentham Wholesale Syndicated Loan fund, the largest holding in the portfolio, which invests in issuers of private companies and a wide range of loans in the United States.

Foster believes there is “reasonable growth” to invest in asset-backed securities, which make up 6.6 per cent of the fund. The fund also uses Goldman Sach’s Alternative Risk Premia fund to access absolute return strategies.

Foster says Aberdeen’s diversified multi-asset teams will “fit well in the new structure” as Aberdeen and Standard Life prepare their £660bn merger.

As of 23 March, the Aberdeen Diversified Growth fund returned 23.5 per cent versus the IA Mixed Investment 20%-60% Shares sector which returned 19.6 per cent over three years.