Jupiter’s David Lewis on how he’s hedging risk in the Merlin range

Gold is the favourite hedge to the various geopolitical uncertainties for Jupiter fund manager David Lewis at the moment and he is prepared to add more to his portfolio.

The whole Merlin range at the UK asset manager has always had some exposure to gold historically as a way to avoid any “opaque strategies” such as derivatives, says Lewis.

Physical gold currently makes up 4.5 per cent of the Jupiter Merlin Balanced Portfolio, which sits in the middle of the risk bands in the multi-manager range headed by John Chatfeild-Roberts.

Lewis says: “Gold is a good store of value, a good hedge in terms of uncertainties and it had a good run recently with what happened with North Korea. We might increase it if risky assets continue to be overvalued.”

Lewis also holds commercial property within the £1.7bn fund as another hedge to riskier assets. The commercial property exposure is through an investment trust, which Lewis says enables him to manage liquidity better. Mayfair Capital Commercial Property trust was specifically launched for Jupiter to access the market.

Lewis says: “During the Brexit vote period the Mayfair Capital Commercial Property trust saw its NAV dropping down 1 per cent but because it only has two investors in it, there were not huge redemption requests.

“We like this fund because managers will buy properties only if we give money to them.”

Lewis and the team don’t intend to make any dramatic changes in the asset allocation for the range. He says equities remain the largest overweight in the fund, keeping the fixed interest to its minimum required by the sector, which is at around 5 per cent.

Lewis says: “We are biased away from fixed interest. We are aware of bonds bull markets, especially in European and Japanese sovereign bonds.

“We only hold them in a tactical style so if we have higher inflation or interest rates we will be able to move on duration.”

The fund holds the Jupiter Strategic bond fund as well as the M&G Corporate bond fund run by Richard Woolnough within its bond exposure.

Lewis says: “The Jupiter fund was seeded in 2008 and since then it has had a very attractive income. We have been investing in the M&G bond fund for a decade. Woolnough is a manager who is willing and able to assess macro very effectively.”

The equity part of the fund is mainly split between UK and global funds.

Lewis says the team invests in global fund mangers rather than US fund managers, claiming this is against the common practice of rival fund managers that invest globally. He adds: “We want to find the best people and in many cases this can trump our asset allocation calls.

The largest global equity is Fundsmith Equity run by Terry Smith, which makes up 11.5 per cent of the balanced fund and 10 per cent across the Merlin range.

Lewis says: “Smith is very talented and disciplined and he’s doing something different. Some people try to put him in this consumer staple bracket but he started the fund with 50 per cent in those companies. He now has 30 per cent in staples names and has moved more into technology and healthcare stocks.”

For the UK exposure of the fund, the largest holding is the Evenlode Income fund, which makes up 5 per cent of the portfolio.

Lewis says: “Evenlode comes to investments in a very practical way, similarly to Smith, with high return on capital moving to more cyclical names. They’ve invested in Burberry and Saint James’ Place, which have rewarded the fund handsomely. The managers are willing to take advantage from price movements.”

Lewis says the turnover of the Balanced fund is very low, currently at 30 per cent, and the only new addition this year has been the Schroder European Income fund which makes up 6 per cent of the fund.

He says: “Turnover might be higher for strategic asset allocation but normally we hold a manager for at least 10 years.

“We are almost entirely invested in active fund managers who we believe can outperform over the long term despite there being some moments when we know they won’t necessarily be able to.”

Over the past three years, the Jupiter Merlin Balanced Portfolio has outperformed the IA Mixed Investment 40-85% Shares sector with returns of 33.7 per cent versus 25.1 per cent of the benchmark, according to FE.