‘Sweet spot’ helps fund to add value

The T Bailey Growth fund slashed its exposure to emerging markets and adopted a neutral position in America – based on, says the joint manager, forecasts of a strengthening dollar.

The £177m T Bailey Growth fund, which was launched in December 1999, has reduced its exposure to emerging markets.
Jason Britton, who co-manages the fund with Richard Martin, points out, however, that this was cut from a high position; the fund’s benchmark allocation to emerging markets is 15%. “I think emerging markets still have a long way to go, but at the current time it is a tactical decision. In the long-term we expect them to power on.”

Britton says he avoided China for some time, which has prompted him to sell out of a fund he rates highly, the Prusik Asia fund. Instead the portfolio is gaining exposure via talented emerging markets generalists such as Nevsky Capital.

Over one and three years to November 26 the T Bailey fund ranked third out of 26 and second out of 21 funds respectively, according to Morningstar. Over one year it returned 9.40% versus the sector average of 3.99%. Over three years it returned 54.09% against the sector average of 41.87%.

Another major theme in the portfolio is a move back to a neutral position in America. “We’ve been aggressively underweight the US for about four years,” says Britton. “The dollar may have reached the bottom of its deterioration. We may go overweight in the near future – we feel that most of the bad news is already out for corporates, and if the dollar has bottomed you have the safety net of it strengthening.”

Britton says that the high relative volatility of currencies will remain, and as such funds of funds will have a big advantage in the global equity sector. He says the T Bailey Growth fund aims to add value in three ways: using a customised benchmark away from the recognised MSCI weightings, performing tactical asset allocation around the benchmark, and fund selection. “We’re in the sweet spot – small enough to access funds when they start up but big enough to negotiate discounts,” he adds.

The group imposes tolerance ranges on its geographical exposure, which, says Britton, prevents it from getting things wrong and helps deliver a consistent performance.
The longest serving holding in the fund is the JPM Natural Resources fund, which has been in the portfolio since August 2002 and is up 507% in that time. “It doesn’t fall into any benchmark categories, which is why our last benchmark category is ‘other’. Another fund that Britton particularly likes is the UOB Kinetics Paradigm fund, an American fund, which he says has returned more than twice the next best fund since it was added.

T Bailey likes using boutiques, says Britton, but not exclusively. “They are attractive to us, but they’re not the only thing we look at. Anything that gives you artificial restriction of products is not helpful. Boutiques are great and we have done well from them, but non-boutiques are great as well.”

At the end of October, the portfolio had a 35% weighting in Britain, 15.4% in America and 14.8% in emerging.