Cautiously optimistic on absolute returns

Miles Geldard, manager of the JPM Cautious Total Return fund, answers questions from Adam Lewis.

Miles Geldard is chief investment officer and head of the Global Multi-Asset Group at JP Morgan Asset Management. He is manager of the JPM Cautious Total Return fund, which launches this month. Before this he was JPM’s head of fixed income, convertibles and balanced in Asia, based in Hong Kong.

Geldard began his career in 1983 at Merrill Lynch, moving on to James Capel, Bankers Trust and the Central Bank of Botswana before joining JP Morgan. He has an MA in Oriental Studies from Oxford University.

Q: The fund is aiming to achieve a return 3% higher than that of cash (Libor). How exactly do you intend to do this?

A: We are going to extract value from a number of different asset classes to achieve the target return, which is set over a medium-term horizon of two to three years. The assets include cash, government bonds, corporate bonds, convertible bonds and equities. This means that when we think the equity market will perform well, we can invest more selectively in equities, and when we anticipate a decline we can switch a number of holdings back into bonds and cash.

Q: At launch will the fund be more biased towards equities or fixed income?

A: The maximum exposure of the portfolio’s assets that we can invest in equities is 40%. However, if we were feeling extremely bullish we could increase this to 50% by the use of convertible bonds. In simple terms, convertibles are a hybrid between corporate bonds and equities, which provide exposure to much of the upside of equities, but with the downside protection of bonds.

Conversely, we can invest a maximum of 100% of the portfolio in the bond/cash portfolio if we become extremely negative on the outlook for equities. Given our focus on preserving capital, we will always hold at least 50% at the lower end of the risk spectrum. At launch we are likely to run around half of the allowable limit in equities, while the rest will be in bonds and cash.

Q: Where will these assets be based?

A: While this is a global fund, at least 60% of the portfolio will always be held in British assets. As a significant proportion of the fund’s UK assets will be held in fixed income, the equities we invest in will tend to be more globally orientated.

Q: How do you select which asset classes to invest in?

A: There are two main elements to the investment process. The first objective is to make sure anything we invest in is consistent with the fund’s risk/reward parameters. To do this I work with the group’s quantitative models to generate a top-down picture of where we should allocate the portfolio’s assets. Based on this, I then build the portfolio on a bottom-up basis, which is largely centred on the knowledge and recommendations of our most experienced and talented experts. In essence, this fund is pulling across the best ideas of the entire firm.

Q: Which areas of the market is the quant model currently recommending you invest in?

A: At the moment the models suggest it is still appropriate to be taking a relatively positive view of equities in general. The markets that look the most appealing are European equities, Japanese equities and emerging market equities. We are less positive on American equities. However, owing to the recent good run we have had from equities in general, we still view them with some short-term caution – hence our current mid-range portfolio stance in the asset class.

Q: How will the fixed income portion of the portfolio look at launch?

Av: The problem British investors are facing in terms of bonds is the flat yield curve, meaning they are not being paid to take extra interest rate risk. So in this context the duration risk of the bond portfolio will be modest; that is, we will mostly be invested in shorter-dated bonds. Our credit exposure will also be conservative and, while we can take currency risk, this will only be in a modest manner. The default position is to hedge currencies back into sterling.

Q: How many holdings in total will the fund be invested in?

A: We have been running an offshore European version of this fund since November 1, 2004, and it currently has 60 individual equity positions, 20 convertibles and about 20 bond holdings. The UK fund will be broadly similar, but may have a slightly more diverse bond portfolio due to the flatness of the yield curve.

Q: How high do you expect the turnover of the fund to be?

A: As this is a risk-averse fund that is not managed to a benchmark, we will have to be fairly brutal to liquidate holdings that are not working. For example, if we get into the situation where a company we own does something we don’t like, or the cashflow is not doing what we expected it to do, we will cut it out of the portfolio. So turnover can be high if we become uncomfortable with the price conditions of a stock. However, if an equity we own is doing exactly what it should be doing, we will hold it on a long-term basis.

Q: Is this fund designed to be an alternative to with-profits investments?

A: We don’t want to categorise the fund like this. In our view the fund management industry needs to provide investors with a broader range of funds with different risk and return profiles, rather than just launching funds investing in single asset classes. This fund won’t achieve a cash plus 3% return month in and month out, but we are confident it will achieve its target return over the medium term.

Q: Who is the fund targeted at?

A: The offshore European fund has taken in 400m (269m), and a lot of this has come from conservative private investors. In the UK we believe the current low-return, rising interest rate environment is driving a shift in investor expectations. Investors are now more concerned with alpha than beta; they want to achieve positive total returns in excess of those available from cash, rather than simply tracking an index benchmark. Most importantly, they don’t want to experience large losses. As a result, we believe this fund’s absolute approach to risk makes it ideal for use as a long-term core portfolio holding.

Q: Will you invest in the fund?

A: I am currently invested in the offshore European version of the fund and I will be putting money into this fund as well. I have managed total return funds since 1999 and they are now coming into their own. These are funds that are fundamentally conservative, but aim to achieve excess returns over the medium term.