Low costs boost fettered returns

Alex Lyle, head of managed funds at Threadneedle, says the advantages of a fettered approach is that he knows exactly what is going on in the portfolios he is investing in

FS Adam Lewis 160 byline

The merits of fettered funds of funds versus unfettered – that is those funds which invest solely in in-house mandates versus those which can invest anywhere – is a debate that while has never become too heated, could became more interesting as the RDR approaches.

Proponents of the unfettered approach point to their wider investment choice as one of their main advantages over their fettered competitors. However Alex Lyle, the head of managed funds at Threadneedle, whose funds adopt an in-house only approach, says the compounding effect of lower fees his portfolios have to pay for access to Threadneedle’s mandates is partly responsible for why they have performed so well.

According to Morningstar over three years to 5 October 2012, two funds Lyle manages in the IMA Flexible sector – NAV Adventurous Managed and Global Equity – are ranked in the top 10 performers.

In addition to their lower total expense ratio, Lyle says the advantages of adopting a fettered approach are that he knows exactly what is going on in the portfolios he is investing in and knows what the underlying managers are thinking.

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“We all sit on the same floor so I see all the managers regularly are know what they are buying,” says Lyle. “This is very important and in addition I have access to all the risk reports.”

At £240m the Global Equity fund is the biggest of Lyle’s mandates in the Flexible sector. The fund is currently invested in 29 underlying Threadneedle funds, with Cormac Weldon’s £1.7bn American Select fund being its largest holding, representing 14.7 per cent of assets at 31 August.

Lyle says this is more of a reflection of the strength of the fund’s manager rather than a call on the US, which over the course of this year he has been cutting back on.

“We were overweight in the US at the start of the year but two months ago we reduced this to an underweight,” he says. “The US has been a strong performing market, with a number of strong, successful companies, while the dollar has done well. However the US equity market is now on a reasonable premium to other markets while the fiscal cliff is an underestimated risk, having greater scope to upset things than some are anticipating.”

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Instead Lyle’s preferred region in Global Equity is the UK. This he says is not a call on the UK economy and is more a fact that it derives a significant proportion of earnings from overseas.

“The UK is a very international market, is lowly rated and is one of the cheapest equity markets with high quality companies and good corporate governance,” he says. “You can find companies that are able to show reasonable growth in a difficult environment and have good yields.”

Lyle’s biggest UK position in Global Equity is a 13.1 per cent holding in the Threadneedle UK Select fund, run by Mark Westwood.

“To run a successful fettered funds you need good performing funds to invest in and I have that,” he says.

Lyle currently has 9.5 per cent of the Global Equity fund held in cash, which is an amount he says he would like to reduce if opportunities arise,

“I would like to go higher in equities but there remain lots of uncertainties, namely in the eurozone, the US fiscal cliff and the general slowdown in global economic growth,” he says. “However against this, valuations are attractive, companies are in good shape and QE is helping encourage investors in various asset classes. We would not surprised that after this latest equity rally if they did not fall back a bit and if this happens it would be a good time to put our cash position to work.”