Investec puts faith in alpha funds

Max King, a co-manager on the Investec Managed Growth portfolio, attributes its success to alpha-generation from its underlying fund managers and an allocation to British small caps.

Developed world stockmarkets could “challenge all-time highs” next year, according to Max King, a co-manager on the £40m Investec Managed Growth portfolio. King says historical data shows that American stocks returned an average of 21% in the 14 months following mid-term elections. With mid-terms taking place next week, the pattern implies equity investors could enjoy a strong run throughout 2011.

King is also bullish on the prospects for the Investec portfolio, which heads the one-year Active Managed fund of funds table. “Performance was good last year and it’s good this year,” he says. “We’re confident that it is going to continue. We’re confident about markets and that we’re invested in funds that are going to generate alpha. This is a prime place to invest.” (article continues below)

The portfolio offers investors global equity exposure through a diverse selection of funds, most of which are investment trusts. King says performance in 2010 has been bolstered by alpha-generation from its underlying managers. He highlights Genesis Emerging Markets, which beat the MSCI Emerging Markets index by six percentage points in sterling terms over the past 12 months, according to Financial Express.

Another allocation that contributed positively to performance this year was British small caps. King says he was frustrated by events which led to the wind-up of the Framlington Innovative Growth investment trust. Despite an improvement in the fund’s performance and proposals for a change in mandate, shareholders elected to tender over half of the company’s shares in August, triggering its liquidation.

King says the decision cost the Investec fund money. “The people who tendered are stupid,” he says. “In one month they arbitraged the discount, but by being uninvested in a liquidating pool, they lost all the gains from the arbitraging of the discount. We would be better off if we’d remained invested in the market at a discount of say, 15% to net asset value, than sitting on a pool of cash, which we’re waiting to get back.”

The Investec portfolio had about 23% of its assets in British equities at the end of September. King says he is likely to “bulk up” the allocation to bring it closer to 30%, including the introduction of a small cap product to replace the Framlington trust.

Around a core of mainstream, liquid funds, King holds regional products and a small number of “more esoteric” strategies. These include F&C Commercial Property and several private equity investment trusts, including Better Capital, Candover and Electra. The portfolio also has exposure to Investec’s Global Gold Oeic – added at the expense of BlackRock Gold & General.