Despite not yet having a one-year track record, the Standard Life Dynamic Distribution fund, managed by Jacqueline Kerr, has quickly risen to the top of the Cautious Managed sector.
A mix of investing in equities, bonds and property has propelled the Standard Life Dynamic Distribution fund to the top of the IMA Cautious Managed sector. As the fund was launched in February it does not yet have a one-year track record. However, according to Standard & Poor’s, from February 20 to December 4 the fund tops the sector, with a return of 8.38% compared with the sector average of 3.31%.
According to S&P, over the 12 months to December 5, the top-performing fund in the peer group – Schroder S&P Cautious Managed – returned 12.11%, compared with a sector average of 8.67%.
Managed by Jacqueline Kerr, head of mutual funds at Standard Life Investments, the Dynamic Distribution fund at present has 44% of its portfolio in British equities, 17% in direct property, 25% in bonds, 2% in European equities and 12% in cash.
Kerr describes the fund, which has reached £27m in assets under management, as a more modern version of a traditional cautious managed fund. She says: “Mainly there have been two types of fund in the Cautious Managed sector: either those with 60% invested in bonds and 40% in equities or the other way around. Having 60% invested in bonds allows the fund to distribute the income to Isa and Pep investors as an interest distribution on the bond element.
“However, I am a great believer in not letting the tax tail wag the investment dog. We think our asset allocation model is far superior and is ideal for those looking for a with-profits replacement or for drawdown from inheritance tax planning.” The fund’s equity, bond and property exposure all comes from the holding of Standard Life funds, making it a fettered fund of funds. “Standard Life has a proud heritage of excellent performance in each of the three asset classes,” Kerr says.
In terms of its British equity exposure, the fund holds Mark Nisnik’s UK Opportunities fund and Harry Nimmo’s UK Smaller Companies, as well as the group’s UK Opportunities, UK Unconstrained and Growth & Income funds. In bonds, its two key holdings are Erlend Lochen’s Higher Income and Andrew Sutherland’s Corporate Bond funds. The fund’s entire direct property exposure comes from holding the Standard Life UK Property Trust. Kerr argues that given where the fund is investing, there is little point investing in externally managed funds. She says: “While in equities there is a large divergence between the best and worst-performing funds in any sector, in the bond space, as returns are less volatile, the difference between the best and worst funds is much less.
“Owing to this tighter possibility of returns it is much harder for fund of funds managers to add value by picking external funds. The same is true in property, where at present there are very few funds to actually pick from, so again there is little value added.”
Indeed, by sticking to investing in its range of funds, the total expense ratio of the Dynamic Distribution fund is only 1.68%. The average for other funds of funds is closer to being above 2%, she says. This explains why the fund has performed so strongly so far, she adds, and why at present the portfolio is yielding just under 4.5%.