T. Bailey’s Peter Askew and Elliott Farley have reduced the Dynamic fund’s exposure to fixed income and increased the cash weighting, taking cash to its highest ever level earlier this year.
The fund currently has 16.5 per cent in fixed income against the IA Mixed Investment 20%-60% Shares sector average of 35.1 per cent according to FE. The fund’s cash weighting reached 13 per cent in April, but is now sitting at 10 per cent – still double the usual 5 per cent.
“We don’t like the traditional fixed income markets,” Farley says. “Relative to our peers we are lower in our fixed income weighting so we are running more cash.”
Askew adds: “Quantitative easing has suppressed yields way beyond where they would be and this has to be reversed. Bond yields will be higher than where they are and we don’t want to be there.”
The managers sold out of the M&G Optimal Income fund earlier this year, and are now looking to put some cash to work.
Askew says: “We have got to be contrarian. As the market gets cheaper there will be more opportunities out there.
“Prices are falling, the MSCI has fallen 14.53 per cent and pockets of Asia are looking more attractive. But it is about considered evaluations. We are not dice rollers.”
The £27m Dynamic fund launched in 2006 and has been managed by Farley since, with Askew joining as co-manager in October 2013, having previously been at multi-family office Salisbury Partners.
The “go-anywhere” fund aims to outperform the sector average and beat its target of UK inflation plus 3 per cent. The portfolio typically has 25 positions with an average holding size of 4 per cent.
“We are not trying to time the markets or be clever, really we are trying to find funds we have a long-term conviction in that when we bring together means we have a sensible range of assets. We are not making big market calls,” Farley says.
Year to date the Dynamic fund has returned 4.4 per cent, against the sector average of 2.3 per cent, FE data shows. Farley deems the performance “pretty good” and says income and growth have come from a range of quarters.
Of note is Polar Capital Healthcare Opportunities, the fund’s largest holding at 5.5 per cent, which has been in the portfolio since October 2013.
Askew says the duo like the healthcare sector because “healthcare may never catch up with demand”.
More traditional healthcare funds or ETFs focus on the development of new drugs, which Farley says is “a very reactive way of delivering healthcare” and “unsustainable in an aging society”. Instead, they are more interested in prevention and the use of technology in healthcare.
“Polar Capital Healthcare Opportunities is not all about producing drugs but rather holistic healthcare for an ever-aging population,” he adds.
The Dynamic fund’s exposure to Asia has hampered performance over the past three months. However, Farley says they have mitigated losses through fund selection. While BlackRock Asian Growth Leaders was hit, Somerset Emerging Markets Dividend Growth has seen more consistent performance, the managers say.
Recent purchases include the closed-ended fund UK Mortgages from TwentyFour Asset Management, which Askew describes as “one of the better debt market operators”. The managers have a 1.6 per cent position in the new fund, which Askew says is “focusing on the strength of the low default rates in the UK mortgage market”.
Year to date the managers have turned over 35 per cent of the fund, broadly in keeping with the average annual turnover of 40 per cent, although the managers say they do not have a target turnover.
“We look at a three-year horizon when buying funds,” Farley says. “Over the past four years 50 per cent of fund managers have moved about. Things like that give us cause to change the funds. The turnover is often driven by external factors and is a matter of us staying on the game.”