Architas’s income fund was transferred from the UK Equity & Bond Income sector to Cautious Managed, to better reflect its risk profile and allow greater flexibility on holding overseas assets.
A desire for “latitude” prompted Architas to switch its Multi-Manager Income fund from the UK Equity & Bond Income sector to Cautious Managed last week. Caspar Rock, Architas’s deputy chief investment officer, says the Cautious Managed peer group better reflects the portfolio’s risk profile. Equally important, the new classification allows him greater flexibility on allocating to non-sterling assets.
Under Cautious Managed rules, funds are restricted to a maximum equity exposure of 60% and a minimum of 30% in fixed interest and cash, and are able to allocate up to half of their assets to non-sterling and non-euro assets. UK Equity & Bond Income funds have more flexibility on the split between equities and bonds, but face tougher limits on overseas exposure – constituents must hold at least 80% of their assets in Britain. (article continues below)
Rock says the sector shift enables him to increase his exposure to areas such as high yield, where global funds offer “a bigger pond to fish in”, and international equity income. The £40m Architas portfolio has held Newton Asian Income and Ignis Argonaut European Income for four years, alongside well-known British equity income products managed by Invesco Perpetual, Schroders and Artemis.
While the bulk of the fund’s equity allocation of 50% to 60% is in British equity income, its largest single holding is an HSBC FTSE 100 tracker. Rock says he is content to hold passive instruments to minimise tracking error and costs, and he also uses a gilt index fund managed by Legal & General. The gilt tracker forms part of the Architas portfolio’s 5.5% weighting to government debt.
In the actively-managed portion of the fixed income allocation, Rock has 22.9% in British corporate bonds, including funds run by Henderson, Old Mutual, Aegon, M&G and Cazenove. He holds a further 3.75% in a high yield strategy and 8.3% in overseas securities, consisting of exposure to emerging market debt, index-linked and government bonds. Rock’s overall fixed income weighting was 40.1% last week.
Away from equity income and bonds, Rock uses less traditional products to boost the portfolio’s yield towards its target of 5%. He holds small allocations to three specialist investment trusts: MedicX, Carador Income and Trading Emissions. MedicX owns doctors’ surgeries, which Rock describes as a “nice little asset class” owing to its upward-only rent reviews, long-term leases and “reasonable” credit risk.
On the outlook for markets, Rock is largely upbeat on the global economy. “If we do go into a double-dip I think it will only be a small negative – any slowdown will only be a flesh wound.”