Barings’ Christopher Mahon is ditching the third party US high yield funds in the Baring Multi Asset fund and bringing the portfolio’s allocation to US high yield in house.
The £154m fund currently has a hefty 25 per cent allocation to US high yield, which Mahon describes as “a big theme”.
The Neuberger High Yield Bond fund is the fund’s largest holding at 15.4 per cent, with AXA Investment Managers US High Yield and AXA Fund Management SA Short Duration HY also in the top 10 with weightings of 5.7 per cent and 4.1 per cent respectively.
Mahon likes the US high yield theme as he believes the US economy is in a “Goldilocks phase”, whereby the economy is far from being strong enough to generate interest rate hikes, but at the other end of the scale it is not about to fall into a recession either.
“We are not likely to see high levels of defaults,” Mahon says. “But we have steered away from energy names, financials and interest rate risk.”
He adds: “We are in the process of internalising our US high yield exposure.”
The Baring Multi Asset fund launched in 2009 and Mahon has been lead manager since 2014. The fund is the retail version of the Baring Dynamic Asset Allocation fund, which Mahon co-manages with Marino Valensise, and follows an absolute return mandate, targeting “equity-like returns with much less risk”.
Mahon claims to take a different view on risk management, following the mantra “less is more”, and is dismissive of managers who try to cover all bases within their portfolios.
“The wrong way to build a portfolio is to have little bits of everything; that is naïve diversification.
“We are high conviction and focus on a smaller number of themes, themes that are uncorrelated in the past and the future.”
That is not to say Mahon runs a concentrated portfolio – indeed the fund currently has 189 holdings, although Mahon admits this is at the upper end of the range he is comfortable with.
“We have quite a few holdings but these are the baskets of ideas behind the themes, such as European real estate.” Mahon explains. “We could have eight to 10 themes in the portfolio at any one time but if we are feeling defensive we will have very few holdings and could have high levels of cash.”
The fund currently has 13 per cent in cash and cash-like holdings and 35 per cent in equities, which typically make up between 10 and 60 per cent of the portfolio.
There are four routes Mahon can take to play out his investment ideas: investing directly in securities; using passive funds; outsourcing to third party funds and using internal funds, which Mahon says is cost effective. Typically, each method accounts for 25 per cent of the portfolio.
This year Mahon exited all of his property positions. Earlier this year he held 10 per cent in property with Henderson UK Property the main name, but with a potential leave vote and the ensuing liquidity issues in the back of his mind, Mahon reduced the property weighting to 7 per cent prior to the EU referendum. The day after the vote Mahon went on to sell the remaining property positions, managing to avoid the fund suspensions that followed.
“We have done well on our positions,” Mahon says. “It would have been better to sell all the property positions before Brexit, but we did well for investors; the property funds went a long way south afterwards.
“There has been an element of war gaming around Brexit, but it has gone well for us this year.”