Cazenove tops up the crisis cashbox

Cazenove Multi-Manager Diversity covers the gamut of investing from cash to unregulated funds but aims for steady returns at lowish risk. The financial crisis is not over yet, its manager warns.

Marcus Brookes, the manager of Cazenove’s £550m Multi-Manager Diversity fund, says his biggest problem is boredom. It’s too easy to get excited, or depressed, about how a portfolio is doing. But constant trading gets you nowhere. You have to be firm with yourself and not get sucked into events.

“I’m an asset allocator. I’m very, very top down,” he says. “It means spending your time trying not to get bored. Your view, your position, may not work for a while, so having intellectual rigour is essential,” he adds, although you do have to test yourself and your portfolio daily.

Multi-Manager Diversity is an unusual fund. It’s not just an equity fund of funds, it covers the full gamut of investing, from cash to fixed income, hedge funds and unregulated funds. Yet it’s not a wild, go-anywhere approach. The fund aims for steady rates of return with what it claims is significantly lower risk than more traditional vehicles. The overall objective is to beat inflation over the longer term by 4% a year.

The strategy seems to be working. Over the past three years the fund is up 12.1% compared with the average rise of 4% in the Cautious Managed sector and over five years it’s ahead 33.4% compared with the sector average of 14.3%. That puts it sixth out of all funds in the sector.

Over one year the picture is more challenging. Multi-Manager Diversity is 139th out of 195 funds with a gain of just 6.7%. (article continues below)

Brookes says the fact that the fund slipped into third quartile was almost inevitable, and is almost inevitably temporary. Its self-imposed rule is never to have more than one-third in equities, compared with the 60% ceiling imposed by the Investment Management Association on the Cautious Managed sector. When equity markets rise strongly, the fund is always likely to drop behind.

“In a bull market, we trail, but over the past three years we have done well because we saw 2008 coming,” he says. “But we have stayed cautious since because we believe this market downturn is different to others.”

He made two significant fund switches as the clouds gathered ahead of the financial crisis. One was to buy Crispin Odey’s OEI Mac long-short fund, which has had sensational performance figures, up 173% over the past five years, with much of the gain coming during 2008 and 2009.

“We bought it in May 2008 at a time when sterling was being crushed and emerging markets were being hammered. But it showed you there were places where you could still make money.”

In total, Brookes can put as much as 20% into unregulated funds, and says he has 6,000 hedge funds to choose from.

His views on property also propelled performance during the downturn. “Through much of 2007 I had Swip [Scottish Widows Investment Partnership] Property, and they have a great property management team there.

“But it was obvious to me that yields were down, economic expansion had happened, and there was a lot of supply on the horizon. So I sold out in December 2007 and switched into Thames River Longstone, another long-short hedge fund. It shared our views on property – only buying prime and fully let properties. The Longstone fund went up 12% while the Swip fund went down by around 25%.”

”Cash looks the most attractive asset right now. Everyone hates it. There’s no yield. But it doesn’t go down”

Brookes’ biggest position is cash, at 22% of the fund, which says a lot about how cautious he is on all asset classes. “For everyone who thinks the financial ­crisis is over, the bad news is that it’s not. We are still very much going through a process of writing off.”

Brookes reckons markets have focused on positive earnings figures and are then hit by macro shocks such as Greece or Ireland. But he’s not comforted by the earnings figures and expects profits growth to come in below expectations.

Stimulus packages give temporary respite, he says, but when the tap is turned off, economies fall back again. “We’re now into QE2 [a second round of quantitative easing] because QE1 didn’t work. It put a floor under the banks, but it can’t ­create growth.” He points to the “cash for clunkers” scheme, which stimulated auto sales massively, but when the scheme ended, sales crashed again.

He worries about the longer-term impact of QE2. “Do you know who the biggest owner of US Treasuries now is? It’s not China. It’s the US Federal Reserve itself.”

This thinking leads him into seeing both equities and sovereign debt as expensive. “Cash looks to me like the most attractive asset right now. Everyone hates it. There’s no yield. But it doesn’t go down.”

He likes credit – but only further down the scale. You are being paid to hold corporate debt at triple-B and below, but not above that. “I’m prepared to take risk in credit markets. But I’m not prepared to take defensive risk in the gilts market,” he says.

Equities still make up 29% of the fund. His major holdings include JOHCM UK Opportunities at 5.8% of the portfolio, ­followed by Invesco Perpetual Income at 5.7%.

But hold on. Neil Woodford? Great fund manager, but is getting access to his fund much of a reason for buying a multi-manager fund? Yes, says Brookes, who compares Woodford with Richard Buxton at Schroders. As an investor, he likes to move in and out of the two famed managers’ funds, according to where we are in the economic cycle. Right now, Woodford’s “dull, stodgy stuff” is precisely the place to be, says Brookes.

A graph ranking Buxton versus Woodford tells Brookes that “the very cyclical parts of the market have gone nuts. Everyone’s talking about Hong Kong property, gold is the superhero and isn’t the Brazilian currency great.”

To Brookes, that’s a signal to switch out. “There’s quality out there, away from the cyclicals. You have to be very wary about mining. There are lots of Rolls-Royce shares, but they’re on Rolls-Royce prices. I’d like to see an admission that we are not as far through the healing process as many people think.”