The flexibility to adapt to any market

The Cazenove MM Diversity fund offers investors many choices, but with the fund’s managers sceptical of a V-shaped recovery the ability to take a defensive stance may be especially useful.

Of the three Diversity funds in its multi-manager range, Diversity, Diversity Balanced and Diversity Tactical, the Cazenove MM Diversity Tactical fund has the greatest ability to be flexible in its asset allocation.

Indeed, the multi-asset fund can be invested in as little as 1% in equities if its managers, Marcus Brookes and Robin McDonald, see fit. Brookes says for this to happen there would have to be an extraordinary set of circumstances, with the realistic minimum amount invested in equities being 50%.

“In bull markets we could go up to almost 100% equities,” he says. “But we can also be defensive during tougher market conditions by using gilts, other government bonds, directional hedge funds and structured products that prosper from falling markets.”

Brookes says the Tactical fund takes strong asset allocation views to protect investor’s capital. Owing to fears about the state of the global economy the portfolio has spent 2009 being defensively positioned.

“There has been a 60% rebound in the S&P 500 since March and a coordinated global recovery, whereby a V-shaped recovery has now been priced,” he says. “In May this year we did raise our equity weighting but we fundamentally disagree that a V-shaped recovery is the way forward. The fundamentals do not justify the current valuations, and organic growth in the UK and US looks awful going forward.”

Owing to the fund’s defensive stance Brookes admits it has lagged the peer group over the past six months. The fund is 65% invested in equities, with none held in fixed income, 15% held in alternatives and 20% in cash. Of the 15% held in alternatives, 13% is held in directional hedge funds and 2% is in gold.

Brookes says if the net long positions held in the hedge funds are taken into account, the fund’s weighting to equities rises to about 72%.

“Cash was the real drag on the portfolio when markets moved up,” he says. “We only expected a 20% rally. The second leg of the rally was very powerful and narrow, primarily focused on financials and mining stocks.”

In terms of recent portfolio activity, Brookes recently sold the fund’s position in the BlackRock Gold & General fund and replaced it with a gold exchange traded fund called ETFS Physical Gold. This followed a strong run of performance from the BlackRock fund, says Brookes.

“I bought the JP Morgan Japan fund in July as Japanese smaller companies look very cheap, with the added value coming from yen outperforming in a rising market,” he adds.

“We also supported the Occam Global Emerging Markets Ucits III fund, investing £1.9m at launch to give us a 4% weighting. So far it has given a double-digit return in no time at all.”

The Occam Emerging Markets fund, managed by the former Nevsky manager Eoghan Flannigan, is described by Brookes as a hedge fund in a Ucits III wrapper. It generated a 14.1% return from its launch in April to the end of August, according to Occam.