Why we’re changing our multi-asset approach
We asked David Coombs, head of Multi-Asset Investments at Rathbones, to explain why he will be buying large cap and international equities direct rather than through actively managed funds, while being more selective in the funds that he does buy
The concentration of fund purchases in the UK has been worrying us for some time. We’ve become increasingly concerned about liquidity and capacity issues that are brought on by ever-bigger funds. Added to this, we think UK managers are starting to struggle to capture alpha in large-cap stocks.
It is widely agreed that fund managers find it extremely difficult to beat the benchmark in US mega-cap equities. We would argue that a similar phenomenon is building on this side of the pond; even amongst European large-caps, it is becoming more difficult to find bargains. UK managers appear to agree with us: Recent research by our analysts found most funds are overweight the mid-cap space, with few investing heavily in the larger end of the FTSE 100 index. Meanwhile, the team of Rathbones research analysts has been growing and expanding into new areas such as international equities and sterling credit over the past few years. That has allowed us to review the way we approach our multi-asset funds.
By October, we will be investing directly in large-cap UK and international equities, as well as sterling investment-grade bonds, rather than accessing them through other actively-managed funds. This has always been permitted, but it is now an explicit consideration. Furthermore, we believe there is a structural shift away from pure multi-manager funds towards multi-asset portfolios that offer a more nuanced, private client-style product, something that is reflected in the move to include direct securities.
With the ability to analyse and select these kinds of stocks ourselves, we can better control our exposure to sector, regional and stock-specific risks. Long-term thematic ideas can be better executed too, including specific opportunities offered by a range of diagnostics and treatments in the healthcare space, and the proliferation of robotics, both in factories and in the home.
Similarly, the sterling bonds we hold will be more nuanced in terms of interest rate risk, credit risk and liquidity. These moves have the added bonus of lowering the cost of accessing global large-cap equities and sterling credit, which make up the core of the multi-asset portfolios. That means we can allocate more cash to funds that offer “better alpha for your money”.
We have always accepted that funds that offer specialised investment opportunities need to charge higher costs than more mainstream funds, which are marketed far and wide to make them viable for managers. Essentially, some funds are distribution-led and others are investment-led. We prefer to buy the latter; this practice will continue. Many managers have rolled out lower prices in recent years, sometimes in pursuit of flows that compromise their investment process. Doing so essentially crushes the ‘golden egg’ under the weight of flows: unconstrained capacity can lead to style-drift and underperformance. To generate alpha, managers need to restrict their fund sizes to a sustainable level. We would therefore rather pay more for a fund which we believe can deliver alpha, and that will do so without destructive asset-gathering.