In the right place at the right time

Most multi-managers say they aim to generate out-performance through fund selection. Toby Ricketts, manager of the £11.96m Margetts Select Strategy fund, however, argues the way for multi-managers to add value is by making asset allocation calls. This can lead to sizeable under and over-weight regional positions and not the lowest level of volatility in the Balanced Managed sector. Over one year to March 14, the fund had a volatility of 2.09 compared with a sector average of 1.97. Over the past three years, Margetts Select Strategy had volatility of 3.33 against the sector average of 3.35.

According to Ricketts, his approach to managing the Margetts Select Strategy fund means investors should take a three to four-year view: “We score the fund at three or four out of 10 on a risk scale. This means investors should put money in for a minimum of three or four years.”

The fund certainly has a better long than short-term performance. Over 12 months to March 14, Margetts Select Strategy returned 12.23% and was ranked 19th out of 40 funds in the Balanced Managed sector. But over the past three years, it is ranked sixth out of 36 funds with a return of 18.24%.

Ricketts estimates that Margetts spends abouts 70% of its time on asset allocation and the rest focusing on fund selection: “We believe multi-managers gain better returns by being in the right place at the right time. If you had been in bonds in 2001, it would virtually not matter which fund you were invested in, as they would have out-performed equities. The asset allocation calls are harder than fund selection because you need experience to know which information and data to analyse in the first place.”

He adds that the fund is currently significantly overweight the Far East and emerging markets, and substantially underweight America: “We have a 2.2% exposure to the US at the moment, which is a 12.8% underweight position. We are negative on the US for a number of reasons. We do not like its loose fiscal policy and its trading relationship with the Far East that is undermining confidence in the economy and helping to sustain the weak dollar. This is obviously more of a problem for UK than US investors.”

Ricketts has added to his exposure in the Far East to reach a holding of 9%: “We believe the Far East will outperform the rest of the world. Companies and governments have been paying down debt and the region produces a surplus over its imports.” He adds that the fund has been a long-term holder of the Aberdeen Far East Emerging Economies and First State Asia Pacific funds. Another 4% of the fund is invested in emerging economies: “We have a 2.5% overweight position to the Far East and 1% to emerging markets.”

The fund has an overweight position in the UK with a 49% exposure as Ricketts believes the economy is better placed than the US: “There is more room for manoeuvre in the UK. Interest rates are higher in the UK and therefore there is more scope to cut them if we head for recession. The US has already cut taxes as well as having lower rates.”

For the past two years, Ricketts has focused on selecting UK funds that invest in dividend generating companies. Its top holdings, for example, are Framlington Equity Income trust and Invesco High Income. But Ricketts adds that this cycle may be coming to a close. The fund has a 6.4% exposure to Ashton Bradbury’s Old Mutual UK select Mid Cap fund, but Ricketts admits to selling out of the Schroders UK Mid 250 fund 18 months ago: “We were concerned it was too large to maintain its strong performance. But Andy Brough has kept performance in line with Bradbury’s.”

Following the terrorist attacks on September 11, Ricketts took a more defensive position in Europe by investing in Hugh Hendry’s Odey Continental European fund: “Hendry did well for us, but a year ago we switched to a more conventional fund in Artemis European Growth. We also hold Jupiter European Special Situations.”

Margetts Select Strategy has increased its weighting to the Japan market: “We believe the market is ripe for investment. The yen could emerge as the next global currency. It is a difficult market to analyse, but the two funds we hold are Schroders Japan and Schroders Tokyo.”

When selecting funds, says Ricketts, he analyses how they have performed during different economic and market cycles rather than on a one, three or five-year basis. “We like to invest with managers who can perform well when markets are rising and falling. If we are very positive about a particular market or region, we might invest in a manager who does well during rallies. But, as a rule, we look for high alpha funds.”

Rickitts admits they make mistakes. For example, he looked at the Merrill Lynch UK Dynamic fund last year, but decided against investing in it because it had done well from commodities: “The fund has continued performing well. We may invest in it if we feel commodities will continue their momentum.”

The next trend identified by Ricketts is to increase exposure to short-dated bonds: “Bonds have effectively enjoyed a 10-year bull market, but we are cautious now because spreads are historically tight. We have been looking for funds with exposure to short-dated bonds. The problem is that under Isa rules, the minimum duration is five years. It is difficult to find bonds with this duration exposure.

“We had focused on high yield and long-dated bonds, but we now looking at the opposite exposure. We could be at an inflection point when it comes to bonds as they look expensive. If there is a strong pick-up in inflation, this will be good for equities and hit bonds.”