Ben Dyson met with Phoebe Stone, who helps run the LGT Vestra model portfolios and the Volare multi-asset funds to go through some questions and thoughts that highlight the Investment Committee’s approach to the management of the portfolios…
Firstly, congratulations Phoebe on being named in the best 30 under 30, 2018 class of wealth managers. With rumours of interest rates likely to rise in the future, how is the portfolio’s bond exposure looking to navigate these trickier waters?
“Thank you for the acknowledgement! You are right, interest rates definitely look to be going upwards and to deal with these changing rates we use strategic bond funds like Jupiter Strategic Bond within the portfolios. These funds allow us to hand over the credit and duration risk management to the managers of these underlying funds. These managers can take advantage of daily/intraday moves in the fixed income markets.”
I am a big believer that India will be the big growth story in emerging markets and the Jupiter India fund managed by Avinash Vazirani is a great way to get exposure to said country. However, the fund seems to have moved sideways in the past 18 months. What is LGT Vestra’s view on the fund and do you agree that India is a fertile investment ground for the future?
“I agree – India’s growth prospects should reward long-term investors and the large population should propel the country forward. Some large reforms in India have spread some market uncertainty over the last year (demonetisation). As you point out the demographics of the country are very attractive; the working population is predicted to keep growing for the next 25 years, there is a growing middle class and India are very forward-looking in their adoption of technology, infrastructure and education. The Jupiter fund expects to generate double the growth of the US over the next 7 to 10 years.”
I’m a big fan of Terry Smith and his fund Fundsmith, yet again he defies the odds and the fund has returned just under 20% last year. But I see his best accomplishment as his low asset turnover keeping costs down for investors which is a view Nick Train of Lindsell Train shares. The portfolios hold both of these managers’ funds and they have done very well. What is the normal asset turnover in the fund?
“Stock turnover within a fund goes hand in hand with the philosophy and investment style of a manager. Many funds split their portfolios into buckets and assign a time horizon to each (i.e. target +/- 20% over a short time horizon, and +/- 10% over a shorter time horizon), or more frequently trade the portfolio in and out of tactical positions. In the model portfolios, we use a diverse range of funds, both in terms of underlying exposure (geography/sector/asset class) but also investment style to ensure diversification and to smooth the return profile of the portfolios.”
“Two years ago, Chinese stock markets sent tremors around the globe but recently fund managers I speak to have increased their exposure to China and Bankers Investment Trust even went as far as to say it is ‘ratcheting’ up its exposure as fast as it can. Do you agree that China’s fortunes have changed and what is the funds’ exposures to this?”
“China’s growth rate during 2017 surprised to the upside, as the country very adeptly managed the start of a transition from manufacturing focused growth to a service led economy. In other words, the country managed its way out of the slowdown of 2015/16. We have increased our exposure to China in the model portfolios by switching out of First State/Stewart Investors Asia Pacific Leaders and into Blackrock Asia Special Situations which has a higher exposure to the country.”
“There’s no point of asking questions without mentioning the Donald! What is the DFM’s view on the latest sign off on the trade tariffs imposed and is there any fall out expected in the emerging market funds or the US equity funds.”
“We do not think it is as bad as it first seemed in that there are exemptions particularly for Mexico and Canada. It is clearly targeting China. If we were to see an escalation of a trade war, it would not help anyone. In the US there are many more jobs that use steel in manufacturing than jobs in steel productions so even in the US it will not be helpful. It plays into Trump’s trade rhetoric agenda and may play well with the protectionist lobby. The timing was interesting in that his announcement came in the build-up to a Pennsylvanian congressional district election. He won the district in the presidential election with a double-digit margin but the Democrats managed to win it despite the Tariffs (Pennsylvania is a steel producing state). As far as market impact is concerned, fears of a trade war will make all equity markets a little more nervous but I think that what has been done so far will not have that much impact. Trump’s talk about further measures on the intellectual property against China may stir up more reaction if he moves on this. We will have to monitor the Twitter stream to see what comes next! In the end, Trump needs to remember that the Chinese are a big holder of US Treasuries and have in effect funded US economic growth for some years. There has been a “virtuous” circle of the US consumer buying Chinese made products and the Chinese recycling the surplus into buying US Treasuries indirectly funding the US consumer.”
“Last but not least Lazard Global Listed Infrastructure seems to have had a terrible last 3 months dropping over nearly 7%. The fund has large exposure to Italy, US and the UK and I was wondering why you believe the fund has dropped so much and what we might do with the fund into the future?”
“The point you raise about infrastructure is fair given the uptick in volatility and the recent drawdown. On the whole, we believe that infrastructure is a key asset class that will suffer from increased interest rates because levels of debt are high for big infrastructure projects. However, we believe that in recent weeks there have been large amounts of indiscriminate selling. You are right Lazard does have high exposure to Europe but Europe remains far behind the US in terms of QE and also the interest rate cycle. This means that not only should European equities continue to benefit from the additional liquidity, infrastructure projects will continue to be financed by ultra-low interest rates. In the Adventurous portfolio, we took advantage of some of the European equity weakness and swapped some of our infrastructure exposure for a European small/mid cap holding that had also experienced some weakness in February.”
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