An in-depth look at
the RWC Diversified
Why is the free lunch
coming to an end?
Clark Fenton and delegates discuss the credit cycle and what diversified return funds can offer investors
In association with
Guide to Diversified Return
An example of a tactical tilt within the portfolio.
“Our tactics tend to be a modification of
our strategic positioning. In other words we add or subtract to an investment based on a major event that is coming up. While we maintain the view that being short European bonds is the right position for the long term, we cut our European bond short positions going into the next ECB meeting. While we still have the view that being short in European bonds is the right long term position, we cut this tactically based on scenario analysis.”
Diversified Return Fund
Is it possible
to achieve true diversification?
For a number of years, investors have not needed to be overly selective to make gains from equities and credit.
A sustained bull market has seen global markets rise in tandem, yet there are signs the days of this free lunch are coming to an end.
The dispersion of returns for different asset classes is expected to grow, meaning investors will have to rethink how they can make alpha
in the future.
shape of recovery?
The go-anywhere solution
In 2018 RWC launched the RWC Diversified
Return Fund following the arrival of the team from Agilis Investment Management.
An unconstrained, multi strategy fund, the managers, with expertise in portfolio construction and risk management, can invest across a breadth of assets and alternative strategies to achieve true diversification. The investment process is driven by the credit-cycle framework which guides the team’s risk management and strategic positioning.
The assets range from equities, credit, commodities, foreign exchange, interest rates, and volatility.
Click to enlarge
Credit cycle framework
While being a ‘go anywhere’ solution the managers operate within a framework that guides their decision making.
This is called the credit cycle framework,
which looks at how debt builds and shrinks accordingly over different points in the credit cycle and looks at the risks of various asset classes in these phases.
“I believe that having a framework that relies as much as possible on objective data is better than relying on investor sentiment or forecasting. Monitoring debt within the credit cycle is a good way to do this and is fundamental to our investment process.”
Click to close
Having determined where we are in the credit cycle, the team will determine the strategic positioning of the fund, namely those assets it wants to be invested in and those it wants to avoid, or short.
The portfolio overall invests in around 10-15 different macro investment themes, which provides genuine diversification. Depending on views on the market the managers will tilt the portfolio strategically and tactically to these different themes as a way to provide alpha.
Expecting accommodating central banks, identified gold miners as a leverage play on price of gold should monetary conditions become looser
Added to the position expecting global central bank easing
Added spot gold alongside
gold mining equities as global fiscal stimulus accompanied monetary largess
Find out more about
the RWC Diversified Return Fund
Meet the team
Clark joined RWC to manage the Diversified Return Fund which he began at Agilis Investment Management. He founded Agilis in 2017 and served until October 2019 as the CEO and CIO. He is the former co-Chief Investment Officer of Permal, a multi-manager alternative-investment firm. Clark joined Permal after its purchase, in March 2013, of Fauchier Partners, where he had been the Chief Executive Officer, responsible for business strategy and management. He also oversaw strategy allocation, manager selection and portfolio construction as a member of the Investment Committee. He joined the firm in 2003 to build its Risk Management function before becoming co-Chief Investment Officer in 2007. Previously, Clark worked at Morgan Stanley on the Equity Arbitrage desk within Equity Derivatives, trading special situations with hedge-fund clients. Prior to that, he helped manage the firm’s hedge-fund lending risk within the Prime Brokerage division. Clark began his career trading fixed-income securities for Montgomery Securities in San Francisco. Clark has a BA from Georgetown University’s School of Foreign Service and an MBA from the University of Michigan.
Charles joined RWC from Agilis Investment Management in October 2019 to continue managing the Diversified Return Fund. He previously ran the London office of Mason Capital Management, where he worked for ten years. His role involved trading event and special situation strategies across equity, equity derivatives, credit, and fixed income. Prior to this he had trading roles at Elgin Capital and Tisbury Capital. Charles started his career in the equity derivatives department at JP Morgan. Charles has an MA in History from the University of Cambridge.
Prior to joining RWC, Praveen managed Operations, Risk and Compliance for Agilis. He was previously the Global Head of Risk Management and Chair of the Risk Committee at Permal from 2013 to 2015. Praveen was also a member of the Permal Risk, Compliance and Operations Committee and helped oversee the re-domiciliation of the firm’s US$ 9.4 billion single manager ICAV platform to Dublin. He was previously Head of Risk Management at Fauchier Partners between 2007 and 2013. Before Fauchier, Praveen was at Harris Alternatives, a Chicago-based investment firm, where he was responsible for building risk-management tools and hedging market risk in the portfolios. Praveen has an MS from Illinois Tech and an MBA from the University of Chicago.
• A long history in the
uncorrelated returns space
• Know-how of cross-asset
Contents | infographic | ROUNDTABLE | interactive video
Harchic itationsedi volo molo dit verumquatin eniet ma consequae pore necessimaion
Must investors in Asia sacrifice income at the
expense of capital or can they have their cake and eat it? We ask two independent experts
HEAD TO HEAD
Since many of the world’s fastest-growing companies reside in Asia, investors may have assumed investing in the region formed only part
of their growth strategy. However, despite being traditionally regarded
as a growth area in which to invest, developments with the region
over the past number of years have led it to be home to multiple
Buoyed by the development of the region over the past decade, and improved corporate governance, Asia now offers yields on par with the more developed markets, such as the US, UK and Europe. As a result, in addition to the traditional growth-orientated active equity for those wanting income, there are a raft of both equity and credit funds to choose from.
In this head-to-head we speak to Francis Chua, fund manager at Legal & General Investment Management, and Amaya Assan, Asia research manager at Square Mile, on their thoughts about how investors should access Asia. Do investors have to sacrifice income at the expense of capital and vice versa, or can they really have their cake and eat it?
We also get their thoughts on Jason Pidcock’s Jupiter Asian Income Fund. In 2005, Pidcock became the first manager to run an Asian income mandate and a decade later he joined Jupiter, with the launch of the fund in 2016.
‘Jupiter Asian Income is a sensibly managed strategy with a well-designed investment framework, run by an experienced portfolio manager’
> Amaya Assan, Asia research manager, Square Mile
There are a number of disruptive forces currently driving global markets, not least the US-China trade war. However, the near-term weaknesses in markets could present good investment opportunities for long-term investors. The Asian region is home to companies that pay a high level of income as well as those that are seeing strong levels of growth. Similarly, funds investing in the region can fulfil both investor income and capital accumulation outcomes over the long term.
In recent years, Asian companies have shown better discipline with regards to capital expenditure, such that corporate Asia is becoming more cash-generative. The yield offered by the Asia-Pacific region is broadly greater than that available from developed markets and it also has a higher expected growth rate over the medium term. Furthermore, payout ratios within Asian companies have not been extended in delivering this higher level of income.
Finally, within the region, managers with a valuation discipline are finding attractive opportunities as the valuation differential between the highest and lowest income-paying stocks is currently very wide.
Asia remains a complex region where the pace of change can be rapid, so it does require careful analysis to identify the likely beneficiaries. More generally, investing in Asian markets brings with it increased volatility due to the greater perceived economic, political and business risks. There are a range of good active managers in the region that have a proven investment process and who are well supported in terms of resource.
We have a high regard for the manager of the Jupiter Asian Income Fund, Jason Pidcock. As a seasoned investor, he has been following and researching companies across Asia over multiple investment cycles. Furthermore, he has a clear and well-defined investment philosophy, which we believe is a strong edge to have. Pidcock essentially looks for quality dividend-paying companies that can increase their dividends as they grow over time. He has a preference for growing companies where he can understand their business models and which, in his view, are both sustainable and scalable.
Given the manager’s approach, we would expect the fund to have a more defensive return profile than many of its peers. We see this as a sensibly managed strategy with a well-designed investment framework, run by an experienced and capable portfolio manager.
‘Managers who adopt a balanced approach to dividend and capital growth, while focusing on strategic longer-term growth, do well’
> FRANCIS CHUA, FUND manager, LEGAL & GENERAL INVESTMENT MANAGEMENT
An interesting trend during the past two years is that, similar to the US, there’s a growth in index investing; however, unlike the US, active managers have also seen a trend of positive flows. In the past five years, the average active manager has outperformed the index. If this continues, we expect it to continue to be supportive of flows.
Our analysis of the universe of active managers suggests managers tend to focus more on mega-cap names, and there is also a slight quality bias. This means that, on average, when the market falls, active managers should be able to offer protection on the downside but might lag behind the index when it rallies strongly. Part of investing in Asia Pacific (ex Japan) is investing into parts of the emerging market universe. Naturally, this comes with higher risk and therefore having a quality bias makes sense to us.
In our opinion, an interesting group of managers are those that are quality-biased but also have strong total returns. One way we’ve seen managers do this is by blending dividend and capital growth, which naturally leads to an income-orientated strategy. A common debate is whether sacrifice is required between income and total return.
We don’t see evidence to suggest this is the case in Asia Pacific ex Japan: over the past five and 10 years to July 2019, returns from active income managers are broadly similar to ‘non-income’ active managers. You could have your income cake and eat it, too.
Income managers come in different flavours so there is an emphasis on good fund selection to understand each fund. One manager we’ve followed closely is Jason Pidcock. The Jupiter Asian Income Fund has ‘income’ in the name because this makes up a big proportion of overall return but, similar to the way we run our multi-asset income funds, Pidcock sees it as a total return fund. In our opinion, managers who adopt a balanced approach to dividend and capital growth, while remaining focused on the strategic longer-term growth themes in Asia, should stand to do well.
UK FUND BUYERS BUYING/SELLING INTENTIONS
ASIA EX JAPAN EQUITIES
UK FUND BUYERS ASSET CLASS OVERVIEW
NET BUYERS Q2 ’19, IN %
> FUTURE FLOWS research
Jason Pidcock became
the first manager to run an Asian income mandate.
Click link for full biography.
Jason Pidcock, head of strategy,
Pidcock joined Jupiter in 2015 and is currently head of strategy, Asian Income, as well as the manager of the Jupiter Asian Income Fund
(Unit Trust) and the Jupiter Asia Pacific Income Fund (Sicav). Before joining Jupiter, he was at Newton (joining in 2004) where he ran an
Asian equity income fund from 2005 until his departure in 2015. Prior to that, he was responsible for stock selection and asset allocation in the Asia ex Japan region for the BP Pension Fund. Pidcock began investing in the Asia-Pacific (ex Japan) region in 1993.
Risks associated with the fund
The fund invests a significant portion of the portfolio in emerging markets, which carry increased liquidity and volatility risks. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. Quarterly income payments will fluctuate. All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.
FIND OUT MORE ABOUT THE FUND HERE
Characteristics of the fund highlighted in recent equity market turmoil
Why is the free
lunch for diversification coming to an end?
In the interactive video below, managers Clark Fenton
and Charles Crowson discuss the opportunities for diversification today.
The video includes interactive buttons which can be clicked on when they
appear on screen to reveal further information.
Watch part 1 in which we explore where we are in the credit cycle and why investors need to look for more diversified sources of return …
… followed by
part 2 of the roundtable highlights in which we take a closer look at what diversified return funds can offer investors today.
These videos are intended for professional investors only, not retail investors.
In this roundtable, delegates spoke to Clark Fenton, fund manager of
the RWC Diversified Return Fund, to hear his thoughts on the credit cycle,
the current state of fixed income and how that informs the need for
true diversification. Watch our highlight videos below
Any data or views given should not be construed as investment advice. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Stock examples are for illustrative purposes only and are not a recommendation to buy or sell. Jupiter Asian Income Fund: The fund invests a significant portion of the portfolio in emerging markets, which carry increased liquidity and volatility risks. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. Quarterly income payments will fluctuate. All of the fund's expenses are charged to capital,
which can reduce the potential for capital growth. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.
The impact coronavirus has had on global markets has dominated headlines in recent weeks and will likely be on investors’ minds for the coming months. However looking at longer-term risks, in the perceived absence of any action to protect the environment from global leaders, it is difficult to ignore the impact Greta Thunberg has had in the last 12 months.
The Swedish 16-year-old has helped raise the profile of environmental issues to such a degree that the ‘Greta effect’, as it has been termed, has had a big effect on investors and has taken hold of the finance industry.
Indeed, Jason Pidcock, manager of the Jupiter Asian Income Fund,
says it could well be that Thunberg has more of an influence on consumer behavior than Karl Marx ever did. With this in mind, Pidcock argues that people’s views on the environment are set to become the single biggest subject investors will have to consider going forward. So, who will
be the winners and losers of this trend?
‘People’s views on the environment are set to become the single biggest subject investors will have to consider going forward’
> Sectors at risk
“I am looking at the attitudes of young people and how quickly certain sectors can become very vulnerable,” says Pidcock. “With flight shaming taking place in Europe, which is a phenomenon I think will spread around the world, one of these vulnerable sectors is aviation.”
Given concerns regarding future demand for air travel, in the last year Pidcock has sold out of two aiport stocks that he held in the Jupiter Asian Income portfolio.
“I’m not suggesting that everyone is going to stop flying,” he says. “However, I think the aviation industry was one that had been looking decades into the future and extrapolating high rates of growth, particularly the airports. The problem is that I do not think demand in 10 years’ time will be as high as people expect.
“I also think airports are companies that can, and do, trade at fairly high price/earnings and it doesn’t take much, if you reduce the long-term forecasts, to see de-ratings.”
> sectors to gain
While Pidcock does invest in shopping mall companies, these are specifically those outlets that are increasingly trying to redesign themselves as ‘living centres’. This means they have gyms, food and beverage outlets and other forms of entertainment rather than simply relying on consumers buying clothes and jewelry in the way that the more traditional retail outlets do.
“Additionally, on the buying side I recently topped up the portfolio’s holding in the Macquarie Group, which is an Australian asset manager/investment bank, but is also one of the biggest managers of green infrastructure assets globally,” he says.
“They are heavily involved in things like off-shore wind farms and putting together long-term investments, such as pension funds, and have the management ability to both manage environmental projects and look for future investment opportunities.”
After looking at changes in consumer sentiment and patterns in how they spend money, Pidcock notes there is the secondary environmental moat of what happens if, and when, we see more frequent environmental catastrophes and how this will specifically impact different Asian countries.
“From my point of view, I think many south-east Asian countries are quite vulnerable, particularly those that have a lot of cities that are close to sea-level and as a result are far more prone to flooding,” he says. “There will be other countries that will have more regular hurricanes and which don’t have enough wealth to repair that quickly. This will mean mass migration, or attempted mass migration, which will disrupt economies.”
The end result is that in the last two years Pidcock has reduced the fund’s exposure to the more emerging markets in the region.
“This is one reason why I remain more comfortable with the more developed markets,” he explains. “Countries that have the wealth and the know-how to be able to adapt to the changes that may be coming.”
> countries at risk
If young consumers take the view that something is not good for the environment and want to spend their money on something less detrimental, Pidcock notes that another sector at risk is fast fashion.
“Clothing retailers that rely on people changing their clothing rapidly and rely on sales to young people could be very vulnerable,” he says. “I recently sold a retailer in Australia who sell a number of different goods, including clothing and fashion. We still expect a willingness from people to buy services, so we still like consumer services and entertainment companies, but we are now much more wary of these fashion companies.”
31 Dec ’19
> Regional breakdown
‘If young consumers take the view that something
is not good for the environment and want to spend their money on something less detrimental, another sector at risk is fast fashion’
How to steer through the biggest
trend the world has ever seen
Hong Kong 17.07
Money market 1.67
Consumer goods 1.53
Basic materials 3.52
Consumer services 9.99
> SECTOR breakdown
Hover over pie chart for data
Why the US-China Trade war won’t end with Trump
Containing the spread of Covid-19 has been the focus of
governments globally, but it has not removed the threat
of trade wars between the US and China. While overall
the MSCI Asia ex Japan Index ended 2019 up by 13.6%,
according to FE, it was far from a smooth ride, with the
fortunes of stock markets in the region fluctuting
quarter by quarer. As such, while markets did spike at the
end of the year on news that an interim deal between the
two countries looked increasingly likely to be reached
Jason Pidcock, manager of the Jupiter Asian Income Fund, does
not expect tensions to dissipate any time soon. Indeed, as 2020
is an election year in the US, Pidcock expects the trade war between
the US and China to outlive Donald Trump, regardless of who
becomes the next US president.
‘Pidcock expects the trade war between the US and China to outlive Donald Trump, regardless of who becomes the next US president’
> Policy containment
> Staying cautious
“We have always invested in China in a very cautious way,” he says.
“In my view, China’s political system is essentially rotten, in the sense
that you have one political party that will be in power for some time.
They set the rule of law and there is no independent judiciary beyond
them. This means a company’s assets can be arbitrarily confiscated
if that political power so chooses.”
Instead, the manager’s preferred exposure to Chinese demand is through indirect means, by investing in companies that are not listed in China yet still benefit from its rise in demand.
“If you invest in the Asian region there is no way you can get away from the size of China’s economy,” says Pidcock. “No Asian investor can have zero exposure, because wherever you invest, you will still have exposure to Chinese demand.
“Instead, we prefer to invest in businesses based elsewhere, which demonstrate upside from Chinese demand, supplementing revenues from their home markets.”
With that being said the country is ahead of the rest of the world in terms of virus containment, so the relative strong performance has been a headwind for us and our view on the region hasn’t changed.
Protracted trade talks between the US and China have proven to be a large overhang for Asian equity markets since 2018
“The trade war is really a containment of China and is not something that is going to be here under one person’s presidency,” he says. “I don’t think any president of the US wants to be in power when it is widely acknowledged that China is now a bigger economy and a more important political power than the US.”
Up until now Pidcock says the US has done a reasonably good job of carrying neighbours in Asia, countries like Japan and India, as it doesn’t want China to become too powerful, too soon. He says: “I completely understand, from a political point of view what is going on and I don’t think it will change any time soon. We’ll get a short-term reprieve, with the US electoral cycle maybe leading to some tariff cuts. This could just be temporary and whoever becomes the next president will continue this policy of containment.”
As a result, Pidcock is currently underweight China in the Jupiter Asian Income Fund, but increased the weighting in March to c.18% of the portfolio. The additions were focused on staples business Hengan, a Chinese producer of personal hygiene products, and China Mobile, the world’s largest telecom network. Both have been and should continue to be more resilient to the Covid-19 crisis as they are driven by domestic demand, so should be more insulated from trade issues.
Percentage held in Chinese equities as at March 2020
Number of companies
across which the
Deep dive into
the Jupiter Asian Income Fund
Independent view featuring commentary from two industry representatives
Jason Pidcock reveals his current favourite stocks for
income in Asia
Jason Pidcock and top delegates discuss the macroeconomic context and key sectors in Asia
How to navigate the
of our time
US-CHINA TRADE WAR
Trade talks between US and China have dragged on Asian equity markets since 2018
Guide to Asian Income