Fetters don’t have to hold you back

Although fund of funds offerings are becoming more popular among the intermediary fraternity, they come at a price. Funds that invest in the funds of external groups (unfettered) typically have higher total expense ratios than those funds of funds that invest only in-house (fettered). But to run a successful fettered fund of funds, a manager needs choice across the board. Andrew Yeadon, manager of the Schroder Balanced Managed fund, says he has the necessary wide selection to choose from.

With the Investment Management Association’s fund rules allowing managers to invest a maximum of 20% of a fund’s assets into one holding, having a wide range of different fund categories is all-important. Indeed, Yeadon notes that the process of selecting funds in the fettered Balanced Managed fund is no different from the two unfettered products he also runs – Schroder S&P High Alpha and Schroder S&P Strategic Balanced.

Yeadon says: “Sector rules state that at least 60% of the Balanced Managed portfolio must be invested in UK equities and between 20% and 25% in international equities. This means that to perform well, Schroders as a group must have genuine fund strength across all the important regions. We have beaten the sector average over the past one and three years because we have this depth, particularly in the UK and Europe.”

According to Standard & Poor’s, over the 12 months to December 13, 2004, the fund was ranked 19th out of 39 funds in the Balanced Managed sector. This was after registering positive growth of 9.31% versus the sector average of 9.41% (bid-to-bid). Over three years, the fund is ranked 12th out of 34, returning 4.46% against the average of 4.17%.

Yeadon, who joined Schroders in 2000 from UBS, where he was head of European strategy and portfolio construction, took over the fund from Tom Joy in June 2003. Launched in 1988, the portfolio is one of the oldest funds of funds in the market, although it was not made available to a retail audience until 1998. Currently with assets of £162m, Yeadon says at the fund’s peak in 1998 it was closer to £2bn.

Despite its opening up to intermediaries in 1998, Yeadon notes that the bigger buyers of the fund remain the institutions. The reason for its lack of popularity among advisers may, he says, be a result of its lack of a trail fee.

Typically, the portfolio holds some 14-15 Schroders’ funds, which he says are selected by drawing on the group’s overall house view on asset allocation, its quantitative equity group and its risk modelling tool Prism.

Explains Yeadon: “Prism is a tool designed for all Schroders’ individual fund manager teams to provide an overview of their risk profile relative to their benchmark. I can use it to look at where fund managers are taking their risks, by looking at where they are investing at the country, sector, style and individual stock levels.”

Over the course of 2004, Yeadon says he reduced the fund’s exposure to cyclical funds, such as Ben Whitmore’s Schroder Recovery fund and Richard Buxton’s UK Alpha Plus fund. Instead, the portfolio has become less aggressive through the buying of income: “At the start of last year the fund held Monthly High Income and the UK Corporate Bond fund, which are now both run by Adam Cordery, and Jeremy Cave’s UK Gilt and Fixed Income fund. I have sold all these and bought Bob Michele’s Strategic Bond fund.”

This, he argues, is because it is harder to find opportunities to add value in British bonds than global bonds, which is where Michele’s fund invests. This is a result of current tight corporate spreads and the tight shape of the yield curve. In addition, the Strategic Bond fund hedges its exposure back into sterling, meaning Yeadon can get some added yield.

Yeadon has reduced the beta of the portfolio because of Schroders’ less than enthusiastic house view on the prospects for British equities this year. This, he says, is because, compared with 12 months ago, it is now much less clear what the markets will do next. “We seem to be at a point of inflection,” he notes.

“We are worried about American corporations disappointing, and as a result the group may underweight equities at some stage in the year. However, we are not enthusiastic on fixed income either, so in the short term we may look to move more into cash.” At the end of November, cash represented 4.9% of the portfolio, but Yeadon adds it is unlikely ever to hold more than 10%.

At the end of November 2004, the fund was 84.1% invested in equity funds and 11.0% in fixed income. Of the fund’s equity exposure, 55.3% was held in British equities, where Yeadon’s largest holding was in the Schroder UK Equity Advantage fund.