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MPS spotlight: The high profile changes fuelling Quilter’s returns

MPS spotlight: The high profile changes fuelling Quilter’s returns

One of the more notable recent moves Simon Doherty made in the Quilter Cheviot balanced model portfolio came after the sacking of River & Mercantile (R&M) star fund manager Philip Rodrigs.

‘Obviously, Philip Rodrigs left as lead manager and we took the decision to exit [the River and Mercantile UK Equity Smaller Companies fund],’ said Doherty. ‘Philip was kind of one of the key reasons why we invested in that fund.’

Doherty (pictured) stated the position had done very well for him – especially over a very strong 2017 – but once the manager left and there was a new team in place, the original thesis for the holding was no longer there.

‘We don’t always make that snap decision, but we felt in this instance it was the right thing to do.’

Rodrigs was not the only high profile name Doherty (pictured) said goodbye to this year.

He revealed that in the first quarter of the year, the portfolio completely sold out of the Woodford Equity Income fund as well, which had detracted from performance. Although Doherty continues to highly rate Neil Woodford’s process, he believes that other positions could give the portfolio better exposure to broader UK equities.

Doherty put the cash from the sale of those two funds to work by increasing his position in Simon Brazier’s Investec UK Alpha, HSBC FTSE 250 Index and the Majedie UK Equity funds.

‘The Majedie UK Equity team has been quite open and transparent about where they see valuations and opportunities in the UK. That has been in some of these badly perceived domestic sectors that until recent weeks has been particularly unloved in the UK.

‘We have not closed out some of the themes we were getting from the Woodford fund but the manner in which they [Majedie] are doing it, I would argue, is slightly more diversified.’

As a whole, the portfolio has reduced its exposure to UK equities, moving the allocation to an underweight position.

In North America, Doherty employs something of a barbell strategy, splitting his exposure to active and passive funds right down the middle.

‘Within the US, we typically allocate active/passive on a 50-50 basis, so we use index funds within the strategy. One of those gives us broad North America exposure, so there is a small allocation to Canada as well; and the other is a more concentrated S&P 500 index fund so we like to capture the market beta.’

Doherty describes the US as a ‘notoriously’ difficult market to outperform, although he admitted that some managers can achieve this over the long term.

‘We are getting broader market beta [from the passives] and then applying tilts around that utilising the Old Mutual North American Equity fund, which is one of our core recommendations here at the business.’

Disappointingly, the portfolio’s active exposure struggled over the first quarter, with the Old Mutual fund down 5.4% against the index.

He also invests in the Schroder US Mid Cap fund, which also had a tough first quarter, ending it down 7.6%.

‘The Schroder US Mid Cap fund, which by very definition is kind of fishing in other areas of the US equity market in the short term, has actually struggled a bit given the prevalence of large cap growth leading the US equity market recently.

‘But we do rate the team at Schroders very highly and feel that this is an allocation that merits a position within the portfolio; but is a satellite allocation in the US, given that it is taking some quite active positions away from your big indexed items in the US market.’

As the portfolio’s allocation moved underweight in the UK, over the last 12-15 months, Doherty has been upping his exposure to Japan, and more recently to emerging markets and Asia Pacific.

‘We were neutrally weighted in Asia and EM until recent times. There are some exciting opportunities in those markets, valuations look quite attractive.’

He admitted the exposure is relatively modest at just under 4%, but noted this is still significant for a balanced strategy.

There has been no substantial change in the fund’s fixed interest positioning recently, remaining underweight the asset class at the headline level.

However, with bonds outperforming equities over the first quarter, this tactical tilt eventually proved detrimental. Year to date, the balanced strategy returned -3.7%, slightly better than the FTSE UK Private Investor Balanced return of -3.8%.

A holding that contributed to positive performance during the period, against a backdrop of volatile equity and fixed income markets, was the Old Mutual Global Equity Absolute Return fund.

The fund, managed by Citywire AA-rated team Ian Heslop, Amadeo Alentorn and Mike Servent, has returned 8.1% over one year compared to a sector average of 1.6%. In the first quarter of the year, it was up 3%. 

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