Schroder reaps benefits of freedom

Exposure to a resurgent Japan, as well as emerging markets such as China and Latin America, has enabled the Schroder S&P Cautious Managed fund to beat its competitors over the past year.

Schroder’s S&P Cautious Managed fund, launched in March 2005, is the best-performing fund in its sector over the 12 months to March 15. Over this period it returned 24.4%, bid to bid, income reinvested, compared with a 14% sector average, according to Standard & Poor’s.

The fund is managed by a five-strong team led by Andrew Yeadon, who has about 20 years of investment experience. He says the fund’s success has a lot to do with its freedom.

“We have no pre-determined style bias,” he says. “Many other funds have static allocations, a strong UK bias and an income bias. But when we set up the fund, we wanted the opportunities to be as wide as possible. Our approach is to put in a number of differently correlated asset classes and then manage the portfolio for the best possible total return, not income. That freedom means we can do a lot of things our competitors cannot do.”

Choosing from a wide range of assets is crucial to Yeadon and his team and provides them with the flexibility they need to run the portfolio. “We mix open-ended and close-ended funds,” he says. “We can introduce more asset classes, not just equities, bonds and cash. Having unit trusts as well as investment trusts allows us to get higher returns in relation to units of risk and we diversify where other people don’t often look.”

Sectors that have proved beneficial include property and equities, says Yeadon. “We are overweight in equities and have been throughout the year, in particular international equities, less in the UK. We are also overweight property,” he says.

An area Yeadon has avoided is bonds. “Bonds were not a good place to be last year and we were underweight in them,” he says. “They were not good value then and they are still not.”

According to Yeadon, a key factor in the fund’s success is good regional allocation. “Latin America and Eastern Europe were our two strongest regions in emerging markets last year,” he says. “Having exposure to Japan and Asia also benefited us. We are pretty good believers in Japan. There is a lot of deregulation and corporate restructuring, so we will continue to be positive because there is a lot of potential. We also focused more on the domestic angle than the export angle.”

“As for Asia,” Yeadon continues, “that is where the growth is, and China is a big part of that. We have bought into the London Asia Chinese Private Equity investment trust. It has a lot of experience in China and a proven track record and is mostly interested in domestic growth. Plus there is not a great deal of competition in this area so it is potentially getting very good prices.”

To help limit risk and choose assets and funds wisely, Yeadon and his team use “Prism”, their risk reporting system. They also benefit from having good relationships with the managers of the funds in which they invest.

“You need both the system and a good relationship,” says Yeadon. “Through Prism we look at tracking error, style risk, concentration and overweights and underweights, plus we can look at our overall portfolio mix.

“We also have around 400 meetings a year with fund managers, and for funds we are holding we meet at least twice a year. It is important to know what is happening and you can learn a lot from those meetings. It really helps us to do our asset allocation. It is invaluable.”