As the unconventional becomes the conventional, Chris Burvill, manager of the best-selling Henderson Cautious Managed fund, is succeeding in making benchmarks fashionable again
Diversification and benchmarking have almost become dirty words in the fund management industry. Virtually every fund manager I speak to has an “aggressive” portfolio, “concentrated” stocks and sneers at benchmarking. But as the unconventional has become the conventional, have we lost something along the way?
Chris Burvill, manager of Henderson’s £1.2bn Cautious Managed fund, thinks so. He is unapologetic that the fund will only veer so far from the index. It has a mix of equities and bonds but within strict parameters that will not let the equity holding exceed 60 per cent or the bonds fall below 30 per cent.
The process works: the fund now has an outstanding performance record, top-quartile over one year, three years and virtually every time period you care to pick. It’s one reason why it is also one of the top-selling funds in the UK at the moment. Cofunds says it was the 11th best seller last month.
“I run a disciplined investment parameter approach,” says Burvill, “redolent of the style of fund management 15 or 20 years ago, but which has gone out of fashion. I take positions relative to an index and a sector, while the market in general has gone more aggressive.
“People say ‘I don’t hold BP or Shell’ but they may be talking of 5 per cent of the market in just one stock. They are taking a very big bet. If it doesn’t pay off, your scope to underperform is huge. Never mind the fact that BP and Shell are cheap anyway.”
But he insists he is not a closet indexer. He makes the big macro asset allocation calls regarding equities and bonds but also generates significant returns from stockpicking. Behind a lot of his philosophy is humility – he knows that fund managers, including himself, get it wrong a lot of the time, and the parameters are there to make sure the clients do not suffer too much when it does go wrong.
He chides himself, for example, for the one time he breached his self-imposed rules, as the equity market was crashing in 2009. He allowed the fund’s equity holdings to dip below 40 per cent, taking it down to 35 per cent, which meant that when equities bounced back he lost much of the upside. “I should have been buying more aggressively. It turned out not to be a good call.”
It is probably because this fund is so successful that Burvill can focus as much on the bits that went wrong as on what went right. He has been bearish on bonds for a long time, meaning he emerged as a winner in the recent sell-off. He reckons gilts are still appalling value even if the 10-year has moved to a yield of 2.5 per cent. He would like to hold more gilts in the portfolio but does not think they will really be a buying opportunity until they are yielding 3.5 to 4 per cent.
But if he thinks they are such bad value, why does he have any? It comes back to those parameters. Burvill is pretty sure gilts are rubbish but in a market that is hostage to events, will not risk being out completely.
He believes equities are where value currently lies, mostly just below the mega-stocks. The fund is 56 per cent invested in equities, not far short of his 60 per cent limit, and he is still buying. “We were negative on equities through 2009 when we should have been more positive. In 2010 and 2011, we held on to our negative view, which gave us the opportunity in summer 2011 to go bullish.”
Weirdly, the signal for Burvill to go bullish was the loss of America’s AAA rating. “We were 47 per cent in equities in August 2011 but within six months we were at 54 per cent. It was simply valuations. We weren’t trying to predict GDP growth but we were seeing equities at price to earning ratios of 10 and bonds yielding 2 per cent.
“It was not surprising equities were going to do better than bonds over the next year.”
Reed Elsevier and British Aerospace have been among his best performers. “We bought Reed on deep value. I’ve held it for 10 years and for most of the time it performed adequately, but over the last two years it has blossomed. It has suddenly become everyone’s favourite.”
He bought into British Aerospace as everyone else was walking away, fearing it would be the victim of cuts in US defence spending. “We didn’t disagree about the cuts but we felt they weren’t going to last forever, and meanwhile it was yielding 7 per cent. Today it’s on 4 to 4.5 per cent.”
Even after the sell-off, Burvill reck-ons bonds are still over priced. “I’m still worried about the bond market,” he says, and suspects the market is not pricing in the risks of inflation ahead. “It can’t be long before we start to worry about some sort of inflation. If the inflation figures worsen, there is going to be a huge scramble of investors into equities or index-linked.”
But do not be too fearful about rate hikes, he says. “The tapering of quantitative easing by the Fed is a good thing. We should not fear it. It’s an indication things are returning to normal. That’s good for equities but it does mean there’s still pain to come in bonds.”
Patrick Collinson is the Guardian’s personal finance editor