How do you rate Investec Cautious Managed Fund?

This month we look at the Investec Cautious Managed Fund and how it has been invested over the past three years. We compare its performance with our own asset allocation model. But first some history – the Investec Fund was in origin Guinness Flight (of which I was a director), launched in 1993. Its mandate was to be a balanced fund, shifting to a limited extent between equities and bonds according to their relative attraction.

A conservative approach

So the fund was for conservative UK investors, perhaps a core holding for ‘widows and orphans’. Under the original stewardship of Chris Burvill (now manager of the Henderson Cautious Managed Fund) it got off to a solid start and successfully navigated the dotcom bubble of the early 2000s, such that by the time the current manager Alastair Mundy took over properly in 2003, it already had a strong track record.

Mr. Mundy had a good relative financial crisis in 2008 – avoiding bank shares would have been one of the keys – and with Investec marketing muscle and a good performance record behind it, the fund grew in size to close to £3bn by 2012. It is worth reflecting on that size a moment – £3bn is a reasonable amount in any terms and such are the economics of the fund industry that it may be throwing off income to Investec of a healthy £30m a year; although purely in investment management terms (as opposed to administration and marketing) it requires little more than the original £3m fund of 1993.

As clear as mud

As an aside here it is not easy to tell how much income the fund actually generates for Investec since there are now so many different share classes and these are not broken down in value, at least in easily publicly available literature. The unfortunate ‘A’ class accumulation share holder pays 1.59% in annual ongoing charges per the 2014 Annual Short Report; in contrast the privileged ‘S’ class pays only 0.09%. Both get the same investment management however. As an aside to this aside, it is extraordinary how little useful information is provided in the short form reports sent out to shareholders (this is not exclusive to Investec I hastily add); there is no indication of the size of the fund and there is no proper disclosure of asset allocation by geography.

Performance issues

Turning to performance the fund has had a bit of a rough ride over the last three years to end of September (and to stress- this is only three years – the ten year record remains very respectable); the first year to 30.09.13 was okay in a strong year for equities, but thereafter the annual returns were negative. Cumulatively the fund has returned 5.9% over this three year period against 15.5% for its investment fund sector (Mixed Investment 20 – 60% shares).

IpsoFacto Investor asset allocation utilising our equity and bond model portfolios would have returned 23.9% and the FTSE All Share was up 23.2%. It is worth saying that our asset allocation is not constrained by the 60% maximum amount in shares, which applies to the Investec fund and its sector, and this was a pretty good period for equities.

Annual % Return 30.09.12 – 30.09.15	30.09.13	30.09.14	30.09.15
Investec Cautious Managed Fund	10.3%	-0.3%	-3.7%
Sector (IA Mixed Investment 20-60% Shares)	8.9%	5.4%	0.6%
IpsoFacto Investor Asset Allocation	17.0%	4.6%	1.2%
FTSE All Share TR	18.9%	6.1%	-2.3%

 

 

 

 

But one of the jobs of asset allocation is surely to take advantage of good periods for equities.
What has gone wrong? As can be seen from the table below the fund started the period with a perfectly sensible asset allocation of nearly 58% to equities and most of the balance in bonds; this allocation has only changed quite marginally over the period.

Investec Cautious Managed Fund Asset Allocation	30.09.12	30.09.13	30.09.14	30.09.15
Equities	57.7%	50.8%	56.2%	51.9%
Bonds	39.3%	43.3%	41.5%	36.9%
Net other assets	2.7%	5.8%	2.3%	11.2%
Derivatives	0.3%	0.1%
	100%	100%	100%	100%

However, if we delve a bit deeper in to the holdings (and again the full portfolio holdings at each period don’t seem to be easily available), we start to see where some of the problems lie.

Top 10 Holdings	30.09.12		30.09.15
UK inflation linked gilt 13	6.4%	UK inflation linked gilt 27	6.8%
Norway Gov. Bond 13	5.4%	US Treas. inflation 23	6.1%
Norway Gov. Bond 15	5.1%	UK inflation linked 29	5.8%
US Treasury Inflation 14	3.7%	Norway Gov. Bond 19	3.9%
UK inflation linked gilt 17	3.6%	Norway Gov. Bond 17	3.9%
UK inflation linked gilt 29	3.3%	UK Gilt 16	3.1%
Signet Jewellers plc	3.1%	Grafton Group plc	3.0%
HSBC holdings plc	2.8%	UK inflation linked 17	2.6%
GlaxoSmithkline plc	2.7%	HSBC Holdings plc	2.3%
Royal Dutch Shell B	2.7%	Citigroup Inc	2.1%
	38.8%		39.6%

Looking at the top ten holdings at 30.09.12 we see a very clear ultra cautious stance; dominated by inflation linked government bonds and short term Norwegian government debt. The top equity holdings, other than Signet were HSBC, Glaxo and Shell. Nothing wrong with any of that for a cautious fund, you might say; but following the transactions through (from the information contained in the short from reports) we begin to see the strong pattern of an economic theory coming into play.

So in the year to September 2013, the main purchases include very short term government debt, inflation linked UK and US debt, more Norway and a gold ETC. Sales are mainly of government debt that has matured or is about to mature. The year to September 2014 follows this trend, but appears to be even more dominated by purchases of gold funds. By the latest factsheet at 30.09.15 the fund had 14.6% in a combination of physical gold/silver and gold and silver shares; 21% in UK and US index linked government debt and only 26% in UK equities. It does hold other equities in terms of Japan (12.5%), North America (6%) and Europe (3.6%); but these are qualified by a short (ie. expecting a fall in value) in the S&P 500 of 15.4%.

All that glitters

What is the economic theory dominating this portfolio? Well it is clearly that of the Austrian school of economics that has been predicting for the last five years that Quantitative Easing would unleash a wave of inflation that would engulf us all. Hence the predominance of gold (usually seen as a good hedge for inflation) and inflation linked government debt, as well as keeping other government debt exposure very short.

In fact of course the opposite to what the Austrian school has been predicting has happened, in that markets have been dominated by a fear of deflation, not inflation. Of course this is not to say that the gold position will not come right eventually, although over most of this period it must have been quite painful. Some of us also believe that Keynes rather successfully demolished the Austrian school of economics in the 1930s.

Gold is not the only thing that has gone wrong; shorter dated conventional gilts have outperformed index linked and, whilst it is not clear how much the currency exposure has been hedged back into sterling, with its oil related exposure, the Norwegian currency has devalued by 39% over the period. Then of course there is the large short position on the S&P (is this really right for a cautious fund?); I am not sure when this was first instigated, but it was in place in October 2013, and since then the S&P, including dividends, has gained 20%.

So beware the zealots of economic theory. How has the predecessor manager Chris Burvill performed? Whilst having had a little of the Austrian about it, his cautious manged fund is up 19.4% over this period and has 52.6% in mainly UK equities and as far as we can see, no short positions. More cautious perhaps?