Premier Diversified Funds: Investment update

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  • 13 mins 40 secs
Neil Birrell, Fund Manager and Chief Investment Officer at Premier Asset Management, discusses the strong performance of the Premier Diversified Fund and Premier Diversified Income Fund in 2017.


Premier Miton Investors

Tel: 0333 456 9033

Email: [email protected]


MIKE HAMMOND: Hello. My name’s Mike Hammond, Sales Director at Premier Asset Management, and I’m joined today by Neil Birrell, Chief Investment Officer at Premier Asset Management, to provide a brief update on the Premier Diversified Funds. Hello Neil.


MIKE HAMMOND: Neil, if we could look at the Diversified Fund initially, as 2017 draws to a close, the fund has had another very good year relative to its peers, so what’s been driving returns during the course of 2017?

NEIL BIRRELL: Well in essence it’s equities, equity markets. We allocate across four main asset classes: fixed income, equities, property and alternatives. The equity market’s been very strong year to date. I mean up until the end of November the World Index was at around about sort of 20%; the FTSE All Share Index trails that little bit, it’s up around about 8%; the fund itself is up around about 16% to the end of November. So as you can see equities have been a very important part of that. So asset allocation has been crucial. Within that, however, I mean clearly there’s been good bits to equity markets and bad bits to equity markets. We look at equities in two different ways using our specialist investment desks, so we’ve got a global equity exposure and a UK equity exposure. So just to split those up and say what’s been good and bad in those two parts, increasingly through the course of this year, as the economic indicators have continued to be positive, we’ve increased the cyclicality of the global equity content in the portfolio.

So what that’s actually meant is we moved away from some of the more expensive sort of growth stocks, particularly in the US, and bought into, for example, things like Volvo in Europe - the truck manufacturer, not the car manufacturer, which is Chinese owned these days - which is a very cyclical-type company. Equally important is CDK, which is a Japanese company, which is very cyclical in its nature as well, and that’s been very positive for us. In the UK, we’ve had some excellent stock selection. We’re a little bit worried about the UK economy, and I think the recent budget goes to show that there are concerns there with the chancellor downgrading economic forecasts. So we’ve looked to invest in companies there which benefit from reduced consumer spending from a weaker consumer, things like B&M stores, On the Beach, the package holiday company, for example, that type of thing.

So it’s good stock selection, it’s good asset allocation, but in essence it’s been the equity market that’s pushed returns on the fund.

MIKE HAMMOND: Neil, whilst equities are a key component of what you’re investing in, you obviously have some exposure to the fixed income market. We’ve seen lots of press comment recently about these particular asset class and we’ve also seen a rise in interest rates. So what are your views on that particular asset class and what are you actually buying?

NEIL BIRRELL: So I mean fixed incomes are a massive area, you know, it’s everything through from sort of government bonds, through corporate bonds, through specialist lending type vehicles, and I guess we’re not very constructive in terms of our views of mainstream bonds or conventional bonds. And therefore in the Diversified Fund itself we’ve got a pretty low asset allocation to fixed income and it’s a little over 5% at the end of November. And nearly all of that is an alternative fixed income, and by that we mean specialist lending, that type of thing. A little bit in convertibles as well. In the Income Fund, we have a higher weighting in fixed income. And there that’s split roughly - it’s around about 29% at the moment - and that’s split roughly 50/50 between traditional bonds, and in that area we’re very short duration and relatively low risk in our corporate bond exposure. The other half is alternative fixed income. So again it’s a specialist lending type area that we got exposure to but the high yielding end of it.

So it is away from mainstream traditional bonds in both the funds. And even where we have got the exposure to mainstream bonds in terms of corporates it’s specialist type bonds in that area as well and as I mentioned a moment ago sort of low risk, short duration plays.

MIKE HAMMOND: And looking at the other component of the portfolio, you’ve got about a fifth of the portfolio in alternatives, what are you looking to achieve from that element of the portfolio?

NEIL BIRRELL: Well, you know, it’s easy to say a number of things but we are trying to achieve a number of things from that element. First of all, alternatives again is a very sort of wide area, Any investment we put into that particular basket has to stand up in its own right as an interesting investment and have the ability to make money for us over the long term. But it’s got to play two other roles within the portfolio. One is we don’t want them to be highly correlated to traditional asset classes, and by that we mean bonds and equities. We spend a lot of time analysing the correlations between the alternatives and those two main asset classes. We want to be lowly correlated or if possible even negatively correlated. And what that does it to have an additional advantage to reduce the volatility of the portfolio overall which is a key sort of message we try and get across in this fund, and indeed we do aim to have volatility below sort of 75% of the index.

And some of those alternatives in themselves don’t always sort of perform when equities are performing. But that’s sort of fine. We have a number of hedge funds in the portfolio at the moment which frankly had a pretty disappointing 2017, but that’s because volatility has been very low. Now, we do expect volatility to pick up during the course of 2018, and that’s when these types of investments will come into their own more and if equity markets are going to be less good than they were in 2017 take up some of the strain in terms of producing returns and also to dampen volatility and provide diversification.

MIKE HAMMOND: So one of the key questions that we tend to receive around alternatives is a question around liquidity. So what’s your view on liquidity in relation to the types of assets that you’re investing in?

NEIL BIRRELL: Sure. Well so far we’ve used mostly investment companies. And it’s really quite interesting this. There’s been some work done by JP Morgan, a few months ago, which show that the alternative investment company area over the course of the last five years has exploded in terms of growth. It’s gone from around about, sort of, in terms of market capitalisation, £15bn to £60bn, and the number of investment companies in the alternative areas has gone from something like 68 to 108. So again huge, so the actual universe that we’re looking at there is significantly greater. And part of that is because there’s been a problem with the banks’ lending since the global financial crisis. They haven’t been lending the way they used to, and so there’s big demand from a number of industries - and this goes back to the fixed income question you asked a moment ago - for specialist lending vehicles, company, peer to peer would be an example, investment trusts lending to the health care industry, that type of thing is sort of coming through. And so we’ve had no real problems with liquidity in that area because the universe has expanded and we’re quite small at the moment.

As the funds get bigger, and they are growing a bit at the moment, if we get to the stage whereby we are testing sort of liquidity issues in this area, then we’ll utilise the skillsets that we have in our absolute return desk, which are much greater than just the investment trust elements of it. So again there’s lots of places we can go to internally and asset classes we can utilise. So we don’t foresee any significant problems with the alternatives liquidity for the point of view of this fund.

MIKE HAMMOND: Thanks for that, Neil. So just turning to the Premier Diversified Income Fund, that fund was launched just over six months ago. The fund has an income objective. So how has the income account performed in the first six months of its life?

NEIL BIRRELL: Well what we’re aiming to do is to achieve a yield of 4¼% from the fund. The fund yearend is February when obviously all the income needs to be paid out at that point. And at the end of November, which has obviously just gone past, we had the first payment. What we’re planning to do is for the three interim payments is to do 20% of the total, so 20-20-20 followed by a final 40%. The first payment that’s just gone XD is exactly that it’s 20% of the 4¼% yield. The yield, the dividend that we pay at the end of February is on track to be an annualised 4¼% yield. And we’re very comfortable we’ll be able to produce that for calendar 2018 and the full financial year of the fund.

MIKE HAMMOND: Finally, how would you summarise your views on the market and how is that reflected across the various funds that you’re managing?

NEIL BIRRELL: Well, let’s kick off with the fixed income markets, the bond markets, commensurable bonds have been in a probably something like 37-38-year bull-run. It wasn’t that long ago we had sort of negative yields in government bonds up as far as 10-year duration. And so it’s difficult to be overly positive on bond markets at the moment. And there’s a lot of people have been calling sort of the bull market to come to an end and a big crash in bond markets. Although for that to happen there need to be a number of things in place. What we’re not seeing is significant interest rate rises around the world, and we’re not seeing significant inflation around the world. Now in that environment you’d expect bonds to probably be OK. Now, we can’t bring ourselves to buy them, but equally I’m not sure there’s sort of too much downside in bond markets at the moment, so that’s reflected in our asset allocation. So in the Growth Fund, the Diversified Fund itself, we’ve got a low allocation there. In the Income Fund, well we still find interesting opportunities to generate income from bonds, we have exposure there, but equally the alternative fixed income space is interesting to us. And so probably we’ve got as low as exposure we can I think probably get away with is the simple answer.

In terms of equities, we still like equity markets – although as they rise we tend of like them a little bit less, unsurprisingly. Traditionally, we’ve had around about 60-66% exposure to equities in the Diversified Fund itself. It’s currently running at a little bit below 60%. And that’s partly driven by the fact that we’ve had quite a lot of cash into the funds. So we’ve allowed cash to build up a little bit as markets have risen. If there are any dips in markets, we’ll look to put some of that back to work. Although, you know, overall I don’t see any sort of significant fall in equity markets coming. We’ve still got earnings growth coming through which is still good. We’ve still got global growth in terms of economic growth sort of coming through. And whilst valuations certainly don’t look cheap, they don’t look outrageously expensive by historical comparison and certainly don’t look outrageously expensive in comparison to bonds. But inevitably as we hit continually all-time highs we become just a little bit more nervous so we’re being a little more defensive in our approach.

I think it’s important to say though that even as markets go higher there’s still opportunities within markets. If you look at the long-term sort of growth stocks, you know, the bond proxies, they look - it’s well-documented this - look really quite expensive. But if you look at some of the cyclical areas we do find value there, so we’re still finding things to buy within the portfolios, with the managers who run the individual pots of money still finding things to buy. What we’ve done a little bit more recently on the Diversified Fund itself is to take out a little bit of insurance. There’s more equity exposure on the Diversified Fund than there is in the Diversified Income Fund, so we bought some puts on the S&P. Now, to give a feel for that we bought them, well they were probably about 5-6% out of the money just at the moment. So that’s not suggesting that we think there’s going to be a crash in markets at all, but between now and the end of June do I think there’s a chance that there could be a correction in markets, sort of 5-6, 7-8%? Yes I do. And as you know we are all about trying to protect capital in difficult markets, and that’s the type of thing we’re looking to do. And also with volatility so low they are really cheap to buy at the moment so it’s a cheap insurance policy essentially.

The other asset classes, we continue to like property. We think the fundamentals there are good. Our universe there is the universe of stocks that our Pan European Property Shares Funds invest in, so it’s REITs, the specialist property companies in the UK and around Europe. The fundamentals are still good, we believe, for property market. Unless we have a crack in the bond markets then certainly the yields available for property across Europe at the moment is pretty attractive; also the companies themselves we feel are pretty attractive on a valuation basis at the moment. So we’re pretty constructive on the property sector as well. In terms of alternatives, and it’s difficult to sort of say about valuations in alternatives given what they are; however, they play a very particular part in the portfolio. We will be looking to increase the exposure to probably hedge funds in particular over the course of the next few months or so in the expectation that if equity markets are to fall volatility will pick up. You’ll see that probably in bond markets as well, and that’s where they should come into their own.

MIKE HAMMOND: Neil, thank you for that overview, much appreciated, and thank you for your time today. And if you would like more information on those funds, please contact us through the contact details shown on the screen. Thank you very much.

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