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Hold your nerve on punishing short on gilts, says Courtiers

Hold your nerve on punishing short on gilts, says Courtiers

Courtiers’ investment manager Caroline Shaw expects the team’s exposure to UK small-caps and its short position in gilts to drive performance this year.

Shaw, who works alongside CIO and former Citywire Wealth Manager cover star Gary Reynolds, takes what she describes as an ‘active passive’ approach to investing by making asset allocation calls and translating these into decisions on indices.

Exposure to different markets is then sought through total return swaps, futures, exchange traded funds (ETFs) and structured notes, which minimises transaction costs, Shaw said.

Despite this, the team has decided to back active manager Aberforth to gain exposure to UK small caps, as she says the lack of liquidity makes it difficult to get exposure through derivatives. In fact, the Courtiers Total Return Balanced Risk fund, which sits in the IMA Balanced Managed sector and is exclusively for Courtiers’ private clients, has an allocation of 5% through the Aberforth Smaller Companies and the Aberforth Geared Income trusts.

‘The UK small-cap area looks undervalued and the Aberforth team believes it does too, and they are well positioned,’ Shaw said.

This sits within the fund’s 33% exposure to UK equities, predominantly through a total return swap on the FTSE.

Shaw highlights the support of the UK’s coalition government for business and the relatively large cash positions on UK corporate balance sheets, which could mean an increase in capital expenditure. This will filter through to the economy, she believes.

Her optimism does not extend to UK government debt, however. She is shorting gilts in anticipation of rising yields and interest rate increases next year. The fund’s 21% fixed interest exposure focuses on US high- yield and UK and European investment grade bonds through ETFs.

Although the short gilt position and UK small-cap exposure have not yet paid off, Shaw expects the calls to deliver over the next three years.

‘Overall, UK small-cap has not had a strong year. Mid-caps have been the area you wanted to be in. Small-cap has lagged behind and our short gilts position has not helped,’ she said.

Over the past 12 months, the Ucits III Total Return Balanced Risk fund has posted a 19% return, while the IMA Balanced Managed sector average was 18.5% during the same period.

Over the past three years, the fund is down 15.6%, compared with a sector average loss of 5.2%. Shaw puts this down to not making cash calls, as client cash positions are decided by the individual’s personal Courtiers manager, who takes tax and pensions into account.

Shaw and Reynolds, meanwhile, concentrate solely on investment management. ‘We don’t hold cash, which can be a blessing in rising markets as we are fully invested, but a curse when markets are falling,’ Shaw said.

She says equity exposure was a crucial performance driver over the past year, particularly exposure to UK and US markets. The fund currently has 79% in equities, including 18% in US equities, 11% in emerging markets and 16% in Europe.

She also highlights exposure to the Indian rupee and zero dividend preference shares as key contributors to performance.

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