Ben Kumar, investment manager at 7IM, has almost tripled the cash holdings in the £806m 7IM Balanced fund over the past two months to face the “challenging” time for investors.
Kumar says since July he has increased the cash holdings from 6 per cent to the current 17 per cent to prevent the fund being too heavy in riskier asset classes such as equities and bonds, as well as using alternatives to diversify.
He says: “It is a challenging time for multi-asset investors for fixed income allocation and at the same time for many equity markets, so there are not many places to go.
“We ramped up the cash holdings to 17 per cent and that came from equities and bonds.”
Since August “niche” alternative positions within the portfolio have been increased from 5 per cent to 16 per cent, Kumar says.
“These are not necessarily more complex [positions] but just more niche,” he says. “We looked at hedge funds, which are not very correlated to equities and bonds, but they are more expensive.”
Kumar says that to counter the expense, 7IM hired a team to replicate the market neutral investment processes of hedge funds, for example through using dividend futures.
The manager says the fixed income slice of the fund, currently sitting at around 25 per cent, will continue to gradually decrease as a result of the focus on alternative investments.
He adds that the only fixed income investments to remain in the top 10 holdings are US treasuries, a 3.2 per cent weighting, but he says that position will be “up for discussion” moving forward as he is not keen on being so exposed to a low return asset class.
On equities Kumar is positive on the recovery for some developed markets, namely the US, and emerging markets, but he is less positive on Europe, the UK and Japan.
He says: “People are more worried about monetary policy than the effect it has on the economy. The US is getting back to strength, but the UK is still uncertain and Japan has been struggling for decades.
“We are not seeing absolutely stellar growth but the data on consumer spending in the US is more positive. We are overweight the US as well as China and India in the emerging market area. In India there is genuine growth with a lot of cash to deal with debt, and reforms of banks are working.
“However, we are quite underweight Europe and Japan and the UK, despite it being exposed to global firms, but we will review our position once the FTSE100 gets to 7,000.”
The Balanced fund sits among a four-fund range including the least risky Moderate Cautious fund and the riskier Moderate Adventurous and Adventurous funds.
Kumar and the 7IM investment team, including Damien Barry and Tony Lawrence, review asset classes once a quarter and build and implement the asset allocation “as quickly as we can”.
The fund’s top holding is the iShares Emerging Markets Local Government Bond Ucits ETF, the most traded in the European-listed ETF marketplace in the aftermath of the Brexit vote, according to over-the-counter exchange provider Tradeweb.
In July alone, the ETF saw a large amount of inflows, taking in €534.8m, which accounted for 46 per cent of its total assets.
Kumar increased the position in the fund from 3 per cent in March to almost 6 per cent in August mostly because of a weaker sterling, which increased the appetite for emerging market currencies.
He says: “We had 3 per cent in March when everything was looking worrying. Yields in emerging markets were spectacular and following the Brexit vote we looked at where the risk was. Sterling rallied so emerging markets currencies benefitted from that.”
Another favourite is the BlackRock Asian Growth Leaders fund, a top holding which makes up 2.6 per cent of the fund.
Kumar says: “We have been overweight Asia for a while. BlackRock’s Andrew Swan is a strong thematic manager who tends to look for opportunities in the narrative behind his positions. The fund is overweight Taiwan as Swan is positive on the region despite the ‘death of the smartphone’.”
Kumar also continues to hold Old Mutual European smaller companies, 2.2 per cent of the fund, in the hope of “a pick up” in the sector over the long term.
Year to date the Balanced fund has returned 8.6 per cent against the 9.4 per cent of the IA Mixed Investment 20%-60% Shares sector according to FE, and is currently yielding 1.2 per cent.