The MI US Select mandate within the Brewin MPS range may raise a few eyebrows given the combination of just two assets and, ultimately, whether this amounts to sufficient diversification? This is a legitimate question and plainly, the answer is probably ‘no’. Investors can rest easy, however, as within the MPS service we dilute what would appear a high level of benchmark risk with the inclusion of a passive vehicle.
Passive funds are difficult to squeeze into a segregated mandate as the extremely lean management fees, already in place, leave little room for negotiation. Therefore, should one choose to pursue this route, the negligible savings (if any) on management fees, would be more than offset by the modest cost associated with managing a segregated account. it is in the client’s interest, therefore, that passive solutions remain in the MPS range for risk and diversification purposes, but that they sit outside of the MI US Select structure.
Turning to the two mandates within MI US Select we have opted to blend two distinct styles, namely Value and Growth. Those familiar with these two styles will know that ‘Growth’ managers have been on a fantastic run. This is particularly the case in the US where the higher growth ‘Technology’ businesses have been the dominant factor in the regions global outperformance. Of course, one does not want to become too complacent to this narrative, it is clear these shares are pricing in some heady expectations and are likely to be subject to bouts of volatility (such as we are seeing) but that doesn’t mean their performance run is over. It is crucial that clients are hedged in some way to the potential for these global innovators to continue to disrupt incumbent business models, eating up market share and international revenues as they go.
To help us achieve this exposure we are utilising the skills of the Baillie Gifford US equity team. This cohort have a rich great heritage of managing growth assets, which is no better exemplified than in the performance of their Global Equity Investment Trust, Scottish Mortgage – a Trust that has performed so well that it now resides in the FTSE 100. The dedicated US desk (where there is considerable overlap in personnel) adopt an identical investment philosophy and approach and have been managing the Baillie Gifford American Growth fund for just over 3 years, where the results are no less impressive.
But no matter the excitement and thrill of modelling the upside potential of these US Technology giants, history is littered with examples of seemingly unstoppable business models somehow missing the frequent changes in consumer trends and, ultimately, failing. It maybe different this time, it may be not. It may even be the case that in attempting to stay on top of developing trends there is an overspend on R&D or acquisitions. That risk aside, as mentioned before the valuations alone are enough justification for a crude bear case. To that end the MPS service and MI US Select utilises a Value strategy to diversify against such risks, as well as hedging against the potential that other sectors outside of Technology start to fire.
In particular, the Value parts of the market are dominated by Financials and, within that, Banks. This has been considered a relatively risky portion of the market but there is a genuine ‘good news’ story developing. Rising interest rates (in the US) mean more profits on loans. Better economic performance and strength of consumers and businesses mean better loan growth. The Trump administration’s deregulation drive is reducing cost burdens and freeing up capital to lend. And finally, as should be the case given the style, valuations are not nearly so rich as those companies within the Growth investment universe.
The team chosen to manage this sleeve of the portfolio is the Value desk at JPMorgan who are to replicate the JPMorgan US Equity Income fund. The track record for this fund looks a little less eye catching versus the broader S&P 500 benchmark but should be analysed in context. It is very hard, if not strategically impossible, for value managers to buy highly rated businesses. Given such names have dominated returns, there has been a structural obstacle for this team to overcome for several years. On that basis the performance from the JPMorgan strategy looks very good indeed, showcasing high levels of skill within this area.
Calling style rotations is an extremely challenging business but over time we may attempt to lean into one over the other. For now, however, we are happy to take an equal weight, recognising the opportunity and threats to each style. What we are left with is diversified market exposure, boosted by the presence of a passive option, with the opportunity to harness outperformance from two investment houses with demonstrable pedigree within the spheres of investment.
Ben Gutteridge, CFA
Head of Fund Research
Past performance is not a guide to future performance.
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The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
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