Uncertainty equals wary approach

LVAM’s Tom Caddick reins in his optimism, even though the portfolio outpaced the sector, and focuses on corporate credit and absolute return funds to mitigate the volatile conditions.

The LV= Diversified Income fund stuck by its multi-asset approach despite volatile markets but the manager remains wary of optimism.

Over the past year the fund, which aims to provide income as well as the possibility for capital growth, has outperformed the Investment Management Association (IMA) Cautious Managed sector. It returned 8.46% against an average sector return of 7.48%, to September 30.

“We look to have exposure to 10 different asset classes within the portfolio including fixed income, property, commodities as well as equities,” says Tom Caddick, the head of multi-manager and fund selection at LV= Asset Management (LVAM). “The initial driver is income but diversified exposure across asset classes should provide the opportunity for capital growth.” (article continues below)

The performance, however, was not achieved without a degree of volatility as from the start of February to April the portfolio gained 5.65% but then fell away almost 4% from that high by the start of July. The moves in cautious managed products are indicative of the tempestuous year across most asset classes that have left managers searching eagerly for opportunities.

The problem is that with bonds presenting diminishing income opportunities the push to look elsewhere for attractive yields is increasing. Last year excitement surrounding the commercial property sector became intense as it saw large-scale price recovery and yields drove up to about 8%.

Since then, however, prime high street yields have decreased and some commentators expect them to level out at about 5%.

“We’re underweight property,” Caddick says. “We’ve seen a revaluation and yields still look quite attractive but liquidity is poor and we have concerns over banks unwinding their exposure and flooding the market. It’s going to be more about location.”

Unusually for the cautious sector the fund also includes commodities exposure. With gold holding at over $1,300 an ounce and crude oil climbing to a seven-week high last week against a backdrop of a weakening global recovery, Caddick says it is difficult to see much value at the moment so he has moved underweight the asset class.

With markets uncertain he says one of the keys will be the absolute return holdings in the fund. In particular Caddick highlights the Jupiter Absolute Return fund, managed by Philip Gibbs, as he says Gibbs has an ability as a market interpreter that is “second to none”.