Borrows says the portfolio adopted a defensive stance by selecting blue chip equities, overseas property, increasing fixed interest exposure and using structured products with capital protection. But it still failed to preserve capital in the way he hoped.
“I am disappointed that lots of assets we have used to be defensive have not moved in that way and the diversification we rely on has not worked well in the past 12 months.”
Mark Dampier, the head of research at Hargreaves Lansdown, agrees that performance has been gloomy but said it is not unusual in these market conditions.
“We have not lost faith in the Midas team, which is extremely good, they have just been caught out in a year that has been unprecedented. Good managers do not become bad managers overnight but they do have bad patches. A diversified portfolio has not helped as everything has been so correlated.”
Borrows began running the trust in 2005 when it was taken over from Aberdeen. It was converted from a vehicle specialising in brewer companies to adopt the Midas team’s value-style, multi-asset investment philosophy.
It holds 65-70 positions varying from direct equities and bonds, funds, structured products, investment trusts and funds of hedge funds. Each asset class has a typical range with 50% for British and overseas equities, 25% for fixed interest, 15% to alternatives and 10% to property.
Over the past 12 months, Borrows was underweight equities and moved even more underweight throughout the period. He holds mostly large-caps with a strong weighting in oil and mining stocks which, even though they have suffered recently, have held up well relative to other equities.
Jardine Lloyd Thompson, an insurance broker, has also been a good performer after benefiting from the strength in the dollar. “It generated a positive return which has been quite difficult to come by in these markets.”
Borrows also holds utilities and telecoms, which he says have done reasonably well, but the trust was affected by positions in the banking sector such as HSBC.
Elsewhere, exposure to Japanese equities benefited from the strength of the yen and Borrows says good manager selection in Asia has also helped performance.
“We invested in the Aberdeen Asian Income fund, which has done quite well and although European equities overall were disappointing, our investment into the Ignis Argonaut European Income fund did well.”
Most recently Borrows has been adding to his fixed interest positions where he sees corporate bond yields as compelling even with a rise in defaults.
An overweight property position was also included on the fund but with a focus on overseas assets as Borrows thought this would be stronger than in Britain. However, this exposure has still been detrimental to returns.
“It has been successful in terms of the call that overseas looked more attractive than Britain but some of the trusts are trading at massive discounts. It has been quite painful and one closed-ended fund that invests in property around the world is trading at a discount of 85%, which is pretty extreme even in these markets.”
Alternatives, which is also overweight on the trust, include funds of hedge funds, timber funds, private equity and an unquoted asset that has increased in size so much it is now the largest holding
on the fund.
Borrows says: “AJ Bell is a Sipp [self-invested personal pension] provider we bought into a few years ago and have a strong relationship with. The investment has grown over that period as we have added to it and now Midas and Invesco each own 15% of the company.
“Our investment is based on the view that the market it is operating in is very attractive and recent trading performance has been strong despite the market downturn. It has been the best performing equity.”
The alternatives segment also includes exposure to structured products, which have been negative for performance due to protection barriers being breached. However, Borrows is still investing in new plans that come to the market with more attractive protection.
Tim Cockerill, the head of research at Rowan, says investors may have fared better from investing in a pure equities offering as this fund has mirrored the performance of the FTSE 100 over the past year, despite having an absolute return objective. “Yes it has been difficult times but the fund is supposed to cope better than traditional equity funds and it has not done that. I wonder if the managers need to re-write their remit or look at the investment process as it is not delivering on the absolute return objective.”