Faith in charts pays off nine times out of 10

David Franklin, 47, is director of retail funds at Christows. He is primary manager of Christows’s Managed Growth, Overseas Growth and Worldwide Growth funds, which were launched in December as sub-funds to the Christows Investment Funds Oeic. He joined Christows two years ago from Quilter and managed offshore versions of the funds. Previously, he was managing director of the investment management division at Johnson Fry and chief executive of BWD Rensburg Unit Trust Management. He is a member of the Society of Technical Analysts and the Master Technicians Association.

Q: Do the funds invest only in ETFs?

A: We could have as much or as little in ETFs as we choose. But we also reserve the right to invest in individual shares, commodities, currency and cash deposits. It will vary depending on market conditions.

But our strategy is that in the longer run we would expect to have the lion’s share, that is, 75% invested in ETFs quoted worldwide.

Q: Doesn’t having so much in ETFs make your funds rather indexhugging?

A: Some ETFs do replicate indices, but there are also hundreds of more specialist ETFs around the world that are baskets of stocks in specific sectors, such as technology, pharmaceuticals and oil. Having access to baskets of shares in market sectors allows us to skew our funds from high beta sectors to more defensive or higher yielding ones.

Q: Can you really make top-down calls ahead of the rest of the market?

A: We are making top-down calls on sectors using a combination of chart analysis and fundamental analysis, but we place the emphasis on charts. The value we add is threefold: first, geographical area selection; second, over or underweighting sectors within that area and, third, market timing.

Markets in the next 10 to 14 years are not going to go up in a straight line as they did in the 1980s and 1990s. There will be tremendous bullish periods followed by horrible corrective ones. Market timing is going to be a far more important component of performance in the years ahead than it has been in the past 25 years.

Q: Would it not be more important to be a stock picker in such markets?

A: Both my backgrounds and that of my co-manager Adrian Clayton’s are as stockpicking fund managers. At Quilter, we ran UK equity income and growth funds so it is not as if it is an area we are unfamiliar with. We just thought that with these three new funds it would make sense to focus more on using ETFs. There are several elements of risk in managing money. There is the timing, sector selection and stock selection. By using ETFs, we can eliminate stock-specific risk.

Q: What are the advantages of ETFs?

A: They trade in real time, unlike conventional unit trusts. Second, they are low-cost. An index ETF’s annual running cost is anywhere between nine and 25 basis points. Finally, they eliminate fund manager risk – if you like media companies, then you get all of them, for example. You know what you are getting. With a fund manager, you would run a risk that he picks the wrong stocks.

Q: What is your investment process?

A: We spend all day analysing all the world’s stock and bond markets, currencies and commodities. We discuss strategy and make changes to the funds virtually every day. Sometimes they are major changes, but more often just nipping at the edges. Our process is driven mostly by trends. The biggest trends we identify are those markets or assets that are underperforming on a relative basis and have scope to outperform.

If we discover a market we think is strong and perhaps unusual, we go off and do fundamental analysis. We have an overweight position in India. We first bought it nine months ago before the story was known. Now everyone knows jobs are shifting there. That has created a boom. We bought the index when it was 3,200. Now it is 6,300. I identify trends and then I do research and come up with interesting things.

Q: Which chart models do you use?

A: The Japanese Candlestick model, moving averages and Elliot Wave theory.

Q: Why do you have so much faith in charts?

A: Charts always tell the truth about what is happening. They are unaffected by psychology. The trouble with humans is that 99% of them follow the herd. Charts have no emotions. They are completely objective, easily understood and I have found nine times out of 10 they have been right.

Q: Do you not think so much reliance on charts might put intermediaries off?

A: No. I talk to a lot of intermediaries and they love them.

Q: How do you control risk?

A: By diversification, but not by too much because that dilutes performance. We are aware of the benchmark and one of our objectives is to beat it. But other than that, we buy what we think will make people money and sell what we think will lose people money. If we have to benchmark then fine, but we will not take a risk just because of the existence of a benchmark index. If I think the US is going into a bear market, then why should I invest in the S&P 500? That is not risk management.

Q: What are your benchmarks?

A: For the Worldwide Growth fund we use both the MSCI World and the FTSE World indices. For the Overseas Growth fund we use the World ex UK versions of these indices. With the Managed Growth fund we take the view that people who invest in it are UK investors, so we use the UK All Share index. It is primarily a UK assets fund but we shall invest in overseas markets when we perceive those investments are going to produce a better return than the All Share index. But if we have to have 15% in Japan to beat that we shall do that.

Q: Do you like to have a low or high turnover in your fund?

A: It depends on market conditions and volatility. But our turnover is probably higher than the average fund because a lot of the work we are doing is based on chart analysis and we tend to restrict our investment horizon to a five to nine-month view.

Q: What are your biggest over and underweight sectors?

A: Broadly speaking, we are overweight new economy, which is media, technology and telecoms, and underweight the old economy, or your classic defensive FTSE 100 stocks. Also, Japan is 11% of the World index, but we are 22%. America is 55% of the world index and we are running positions as low as 12-14%.

Q: Are you playing any themes?

A: The most interesting trend I can find at the moment is Latin America. I have just under 5% there, which is the largest holding I have ever had there. More television sets are made in Mexico than in any other country.

Q: Do you put your own money into the fund?

A: I can do so, but I haven’t because I put my own money and pension fund into individuals stocks. These funds are suitable for conservative, medium to long-term growth investors.