Andrew Cole manages the Baring Multi Asset fund. He joined Baring Asset Management’s fixed income department in 1986, moving to the firm’s multi- asset portfolio team in 1995. He was appointed to Barings’ strategic policy group in 2005.
Q: Baring Asset Management will launch the retail Multi Asset fund on March 23. Which asset classes does the fund invest in?
A: We have got as broad an investment universe as you might care to imagine. Loosely it is bonds, equities, cash and we also look at the alternatives space. We can do hedge funds, property, gold and structured products. But we tend to be a bit old fashioned in the sense that we think bonds and equities explain most risks – everything else tends to be a derivative of that.
Q: How do you access these asset classes?
A: We have direct exposure where we think it is appropriate – we try to keep the TER [total expense ratio] down. Third party funds come at a cost, but we will use them where we cannot otherwise access an asset class.
In the Baring Dynamic Asset Allocation fund [an institutional version of Multi Asset, launched in January, 5 2007] 10% of the portfolio is passive in terms of equity exposure, including exchange-traded funds [ETFs]. I expect that weighting to come down as the environment suits stockpickers.
Within the bond allocation we invest in corporate, government, index-linked and convertible securities. Convertibles are particularly attractive at the moment – we do not have the expertise in-house but we have identified successful third party managers.
We have direct exposure to gilts, and we use our in-house expertise and third party managers for corporate bonds – it is a hybrid approach.
Q: You expect to generate 25% of fund returns from active management within asset classes. How do you select individual investments?
A: When it comes to UK equities, our UK equities team does the screening and fundamental analysis. If I can get 1-2% outperformance from UK equities that is sufficient – owning the right asset is more important over the long run.
Q: Do you have any expectations on levels of turnover in the fund?
A: No. We try to keep overall asset allocation turnover to a minimum, to keep expenses down – that will prove to be a big differentiator over the long term. But we do move asset allocation around. In mid-2008, we had 15% in equities and in October/November we decided to add more risk.
One of our core beliefs is the equity risk premium. Equities should offer a higher return because they are higher risk, and we began to feel that the recession was already priced in. At the same time a depression was priced into corporate bonds. We took our equity weighting to 30% and our corporate bond exposure to 5%.
Today we have equity exposure of about 40%. Corporate bonds and convertibles account for close to 13%, and we continue to have index-linked bonds – we worry about the inflationary effects of quantitative easing.
Q: When do you expect to see the impact of quantitative easing in inflation data?
A: Deflation will be a 2009 phenomenon – I do not expect the fall-off in energy prices to be repeated. Recent inflation data has been stickier, and the chances of a policy mistake – keeping policy too loose for too long – are almost inevitable. At some point the market will start to worry about that. Gold prices suggest the markets are becoming more fearful about the conduct of monetary policy, not just in the UK but globally. Investors need to be aware of the risks on a medium-term time-horizon.
Q: How closely is the fund modelled on Baring Dynamic Asset Allocation?
A: The asset allocation will be a direct mirror where the legal niceties allow. When we launched the institutional fund we started with 70% in equities, which allowed us to capture the upwards move in equity markets. Then we switched to capital protection mode and we got down to 15% in equities.
The process has been running for the last nine years. Most investors have seen returns in the Libor [London interbank offered rate] plus 400 basis points ball park, with significantly lower risk.
Q: You mentioned that equities are at about 40%. How is the rest of the fund divided up?
A: We have: 18% in UK equities, 5% in European equities, 10% in Asian equities and 5% in gold shares, food stocks and emerging – that makes 38% in equities. A further 10% of the fund is in a physical gold ETF. We established the position in the summer of 2007 – we would have lost out if we had invested in gold shares.
Hedge funds are 2.5%, although we sold down most of our exposure 18 months ago. Gilts are 5%, index-linked is 8%, international bonds are 5%, corporate credit is 9% and convertibles are 3%. The rest is basically cash.
Q: How does the British equities portion break down?
A: About 6% is in passive ETFs, but we are looking to allocate away from passive exposure. We really want to identify a portable alpha structure, either in-house or from a third-party manager. We can then overlay beta exposure as appropriate.
Q: How closely do you consider liquidity when selecting investments?
A: Almost everything in the fund is traded daily – I am subject to inflows and outflows and we are plain-vanilla people. Liquidity can also present opportunities. For example, liquidity conditions for corporate bonds seem to be improving and some of the premium we have bought will be realised.
Q: How do you manage currency risk in the fund, and risk more generally?
A: Most of our clients are sterling-based – we are not looking to bet the ranch against sterling. At the moment our sterling exposure is 70%.
Over the long run we aim to generate equity-like returns with two-thirds of the risk. We look at absolute risk, recognising that historical data is not a guide to the future. We learnt a lot of lessons through the dotcom bust in 2000, and through Barings’ own problems [the collapse of Barings Bank] in 1995. The team has lived through a lot of market cycles and we know that risk models are not the be-all and end-all.
There are times when you want to add risk and times when you want to take it away. We are in a time when we want to add risk – I think the glass is half-full and, while we have still not seen the low, we could get a market revaluation.