McDermott (pictured) says he takes a very long-time horizon within his pension and, unlike with his ISA, he doesn’t tend to chop and change his holdings. However, when he feels a region or sector is falling out of favour, he will add to his exposure. “I take a very long-term view in my pension and I have been investing into it for more than 15 years. I am much less active in my pension than with my other portfolios as I tend to pick what I think are the best managers then stick with them,” McDermott said.
Source: FE Analytics
As the table above shows, McDermott has 15 per cent of his portfolio invested in Japanese equities via the Legg Mason Japan Equity and Invesco Perpetual Japan funds.
“I have a reasonable structural overweight in Japan and I have made some good calls, but whenever the market is having a hard time I will usually top-up my weightings,” he said.
“I think Japanese equities are also cheap at the moment and that Abe’s changes will be beneficial over the long-term. I was chatting to a manager who is based in Tokyo and he pointed out that there isn’t going to be one solution to the so-called “third arrow”, but a culmination of structural reforms.”
McDermott has been topping up his exposure to his two Japanese funds not only because he feels they are fundamentally undervalued, but because of the subtle changes to the inheritance tax system and visa applications, which should promote domestic investment.
He says there will also be returns to be made over the short-term as the Bank of Japan continues with its QE programme.
McDermott is using the Legg Mason and Invesco Perpetual fund because he believes they create a good blend.
Hideo Shiozumi’s £197m Legg Mason Japan Equity offers small cap growth, while the Invesco Perpetual Japan fund, which is managed by Paul Chesson, uses a large-cap value strategy. Indeed, they have very different risk and return profiles.
Chesson’s fund has been the fourth best performing portfolio in the IMA Japan sector over 10 years with returns of 75.1 per cent. It has only underperformed against the sector in three of the last 10 calendar years.
The Legg Mason fund on the other hand has considerably outperformed in strongly rising markets, but has fallen a lot further during periods of market weakness.
The fund sits in the bottom quartile over 10 years thanks to massive losses between 2006 and 2009, but it has been buoyed on by Abe’s reforms, topping the IMA Japan sector in 2013 with returns of 63.65 per cent.
Performance of fund vs sector in 2013
Source: FE Analytics
McDermott has been adding to emerging markets via First State Asia Pacific Leaders, First State Greater China Growth and Lazard Emerging Markets. Combined, he holds 23 per cent of his pension in the developing world.
“I do try to add to areas which I think are cheap and I would put emerging markets in that bracket,” McDermott said.
“I have recently been making contributions to those three funds. I’m not saying they are going to rebound straight away – it could take a few years. However, I don’t mind being early.”
The £6.4bn First State Asia Pacific Leaders fund, which is headed up by Richard Jones and FE Alpha Manager Angus Tulloch, is McDermott’s largest individual holding within his pension, with a 15 per cent weighting.
It has been one of the leading lights in the IMA Asia Pacific ex Japan sector, ranking second overall over the last 10 years with returns of 349.25 per cent.
McDermott is a long-term bull on China and has direct exposure to it via FE Alpha Manager Martin Lau’s First State Greater China Growth fund. It has been the best performing fund in the IMA China/Greater China sector over 10 years.
These First State funds have a quality bias and tend to outperform in down markets and lag during rebounds. He has more general exposure via the Lazard fund, which has also been top quartile in its sector over one, three, five and 10 year periods.
Though McDermott has a high weighting to emerging markets and Japan, he does hold a globally diversified portfolio. He owns Neptune US Opportunities and combines the Threadneedle European Select and Jupiter European Special Situations funds to gain access to the recovering European economy.
The UK is also well represented, with Derek Stuart’s Artemis UK Special Situations fund, Nigel Thomas’s AXA Framlington UK Select Opportunities fund, Julie Dean’s Schroder UK Opportunities fund and Giles Hargreave’s Marlborough Special Situations fund all making an appearance.
All four of the managers have the coveted FE Alpha Manager rating.
“The decision to hold these funds goes back to my point that I try to pick the best managers in the sector and stick with them,” McDermott explained. “I’ve been a long-term supporter of all of them and both Derek and Nigel’s funds have been on my buy-list for 10 years or so.”
Artemis UK Special Situations, AXA Framlington UK Select Opportunities and Schroder UK Opportunities all sit in the IMA UK All Companies sector.
McDermott says he likes them because they aren’t just out-and-out mega-cap funds, as they look to add alpha by looking at smaller FTSE 100 stocks as well as small and mid-caps. All three of them have a strong track record, comfortably outperforming the sector and the FTSE All Share over 10 years.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
They have all also been top decile for alpha generation, relative to their benchmark, over the period.
McDermott uses Marlborough Special Situations to gain direct exposure to UK small-caps, and has a satellite holding in Richard Watts' £1.4bn Old Mutual UK Mid Cap fund for FTSE 250 exposure. Overall, he holds 23 per cent of his portfolio in the UK.
McDermott is very bearish on bonds, and only holds one fixed income vehicle – Henderson Strategic Bond fund, which is run by FE Alpha Managers John Pattullo and Jenna Barnard.
“I’ve gone out of my way not to have too much in bonds. I’ve got John and Jenna’s fund, but I prefer using alternatives like absolute return funds and property funds to diversify my equity holdings,” he said.
McDermott is a big fan of Henderson, using its UK Absolute Return fund and UK Property fund as well.
He likes the long-short equity strategy of the absolute return fund, which has made a positive return in all but one calendar year since its launch in 2009. It lost just 0.44 per cent in 2011. It lost just 0.44 per cent in 2011.
The “bricks and mortar” property fund is included as it has no correlation to the equity market, and has a healthy yield of 3.6 per cent.
McDermott also uses the Schroder Global Property Securities fund, though it is one of his smallest holdings.
The one fund which he says has frustrated him in recent years is Neil Gregson’s JPM Natural Resources portfolio. Though it gives him diversification, he says he has been scaling down his exposure due to the uncertain outlook for the sector.
Performance of fund over 3yrs
Source: FE Analytics
However, he says it isn’t going to be one he will sell-out of completely.
“It has gone consistently down over recent years, but while I’m not so much of a super cycle believer so to speak, I still think China will grow,” he said.
“Though China is shifting to a consumer driven economic model, China’s premier has been saying there is still a fair chunk of urbanisation that needs to be done in certain parts of the country.”
“Demand will still be there for basic materials and I expect the new emerging market economies to pick up the slack.”
