Fund shifts weights to stay strong

Sarah Arkle and Alex Lyle of Threadneedle Equity & Bond adjust the fund’s weightings in a balancing act to meet market conditions. The fund’s next move will be in favour of equities.

The £668m Threadneedle Equity & Bond fund is a fettered fund of funds managed by Sarah Arkle since 1999. Alex Lyle is the deputy manager.

Launched in 1997, the fund is ranked fourth out of 37 funds in the IMA Cautious Managed sector over one year, according to Morningstar. Over three years it is ranked fifth out of 25 funds. It returned 2.66%, compared with a sector average decline of 1.77%, over one year to January 21. Over three years it grew 24.8% against a sector average of 19.27%.

The largest weighting in the portfolio is an 18.8% position in the Threadneedle Sterling Bond fund, as at November 31. The second largest is a 17.8% weighting in the Threadneedle UK fund.

Lyle says the overall split between equities and bonds in the portfolio has shifted over the past year and that it may move again in the next few months.

A large overweight position in equities was reduced in the second half of 2007, leaving only a slight overweight. At present 46.5% is equities, 45% in bonds and the remainder in cash.

“In the autumn of last year we started reducing equity allocation,” Lyle explains. “We reduced our UK exposure, Japanese exposure and Asian exposure. We were profit-taking in equities and we re-utilised the proceeds in bonds.”

However, Lyle says that equities now look attractive. “We are reasonably optimistic about the outlook,” he says. “Valuations have come back to very attractive levels. We expect to increase the allocation to equities.”

Although Lyle expects the year ahead will be “tough”, he still sees room for optimism in both emerging and developed markets. “We will see positive growth out of the US in 2008 and we expect the Fed [Federal Reserve] to continue to cut rates,” he says. “Similarly, in other developed economies we expect to see positive growth.

“We should [also] see continued strong consumption growth in emerging economies. There is still momentum there. [Emerging market] valuations are more expensive than they were but they still look attractive.”

The portfolio’s largest overweight is in the Pacific Basin. It is also overweight British and European equities, while underweight in American equities.

Over the past year, Lyle says, the fund “benefited enormously” from having an overweight position in Asia and by taking a defensive stance, mainly through its exposure to the oil and utilities sectors. The portfolio was also underweight financials, which Lyle says was “highly beneficial” to the fund. Consumer discretionary sectors in developed economies are another underweight area.

“We are in a tough environment now,” says Lyle. “We need strong, reliable and well-managed companies that can show reasonable growth and – most importantly – strong balance sheets.”

There are 15 funds in the Threadneedle Equity and Bond fund. Lyle says one of the best-performing over the past year is the £1.3 billion Threadneedle UK fund, managed by Leigh Harrison.

Over one year to January 21 the Threadneedle UK fund ranked eighth out of 309 funds in the IMA UK All Companies sector, according to Morningstar. It returned 3.49% compared with a sector average fall of 5.72%.