A Defensive Core Fund for the Tougher Times Ahead

4 mins. to read
A Defensive Core Fund for the Tougher Times Ahead

The recent cut in interest rates and additional Quantitative Easing (QE) announced by the Bank of England has helped stock and bond prices to rally sharply after the initial post-referendum sell-off.

It is too early to assess the impact of Brexit on the UK economy, although survey data suggest that the decision to leave the EU has had a big impact on the construction industry and wider jobs market. When the economic data starts to come through it could easily undermine investor confidence, with some predicting another recession.

In this sort of scenario it would be sensible to bank some of your recent profits and reduce the risk in your portfolio. One way to do this would be to invest in the Pyrford Global Total Return fund, which aims to provide a stable stream of real total returns over the long term, with low absolute volatility and significant downside protection.

Solid, repeatable investment approach

Pyrford International was set up in 1987 and mainly manages funds on behalf of institutional investors and high-net-worth individuals. Their £2.3bn Global Total Return fund was the first to be made available to retail investors via the issue of a new share class in November 2015.

The fund was originally launched in January 2009 and operates in the Flexible Investment sector, which is the least constrained part of the market. It is diversified across different asset classes, geographies and individual holdings, with the currency exposure being actively managed to preserve capital.

Pyrford, a wholly owned subsidiary of the Bank of Montreal, employs a team of 13 investment professionals who have an average tenure at the company of over 11 years. They operate under the direction of their CEO, Tony Cousins, but the institutional focus means they are not that well known amongst retail investors.

The first stage in the team’s investment process is the asset allocation decision, which is based on five-year earnings projections for the bond and equity markets in their investible universe. This allows them to determine the relative value of the different areas and how much of the portfolio to commit to each asset class and country.

They then use a bottom-up approach in each market to identify well-priced large or medium sized companies that are leaders in their industry, with superior management and a solid capital structure. This is followed by a detailed financial analysis to assess the earnings per share and total return expectations of each of the businesses. Face-to-face meetings with the directors form an important part of the process as they are able to provide first-hand knowledge of the company, its management and its operations.

Successful record of protecting capital

The Pyrford Global Total Return fund invests in a combination of shares, government bonds and cash to generate attractive long-term growth with less volatility than the stock market. Cousins and his team use a disciplined, long-term approach but vary the asset allocation according to their outlook.

Analysis by Hargreaves Lansdown suggests that the fund has successfully sheltered capital during tougher times for stock markets more often than not, whilst achieving an inflation-beating return over the long term. This was particularly in evidence in the run up and aftermath of the credit crisis.

In 2008 Cousins and his team thought that stock markets had become overvalued and reduced their exposure in favour of government bonds. This resulted in some decent returns at a time when many funds lost money and they then went back into shares in late 2008 and early 2009 before prices started to rally.

Most funds that aim to protect investors’ wealth use derivatives to reduce risk, but Pyrford Global Total Return only invests in large cap shares, high-quality sovereign bonds and cash. This is a much simpler and cheaper approach that relies on good asset allocation.

At the end of June the largest allocation was the 39.5% exposure to UK gilts. A further 20% was invested in overseas bonds, with 18.7% in UK equities, 17.8% in international equities and 4% in cash. The five largest shareholdings were GlaxoSmithKline, National Grid, British American Tobacco, Vodafone and SSE, with all of them around the 2.1% to 2.7% mark.

It is a concentrated portfolio with 54 equities and 13 bonds. The shares are typically highly resilient, non-cyclical companies and are generally held for an average of eight years.

The fund has achieved a positive annual return in each of the last five years and has a remarkably low annualised volatility of 4.21%. Its maximum drawdown – worst peak to trough loss – was just 3.34%, which took place between April and September 2015. Since inception in January 2009 the class A accumulation shares have made an annualised return of 5.38%.

These are highly unusual market conditions with US equity indices like the S&P 500 close to record highs and many government bond yields at all-time lows. Central bank policies have distorted large parts of the market, which means that almost anything could happen.

In this sort of environment it pays to be cautious and a fund like Pyrford Global Total Return could be a good option, especially as the managers have plenty of freedom to react to events and take advantage of the opportunities as they come along.

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