However, Brookes (pictured) – who heads up the fund of funds range with Robin McDonald – says he is struggling with the question of whether to make a clean switch from cyclical to defensive funds. While the manager is concerned that more economically sensitive stocks are looking pricey and wants to rotate out, he says investors can’t rely on the safety of defensive funds in the current environment as, though they have underperformed versus cyclical funds, they are by no-means cheap.
“We bought in on the basis that while cyclical funds have performed well, not all defensive funds are cheap,” Brookes said. “We still have cyclical funds, we are not all defensive.”
“There are two parts to this,” he added. “Cyclicals have done really well and are nowhere near as cheap as they were.”
“Normally, you would look to go back into defensive funds but they have not underperformed at the magnitude you would have thought.”
“One of the reasons for that, in my opinion, is because bond investors have been reaching into large cap income-paying stocks for safety.”
“The time to be buying into defensive funds would be when people are saying, 'Wow, Neil Woodford is a dinosaur'. That hasn’t happened and those sorts of funds have actually made you money recently.”
“You have to be very careful at the moment of putting all your money in one place,” Brookes added.
Large cap pharmaceutical stocks, such as GlaxoSmithKline, Pfizer, Sanofi, Roche and Novartis, are commonly viewed as some of the most defensive equities in the market as they have reliable earnings – there is always a need for medication – and a good and reliable dividend.
The £109m L&G Global Health & Pharmaceutical Index fund was launched in 2000 and tracks a bespoke benchmark, giving investors decent exposure to some of the largest names in the sector.
According to FE Analytics, it has returned 123 per cent over 10 years and even made money in down markets such as 2007, 2008 and 2011.
Performance of fund over 10yrs
Source: FE Analytics
Brookes counts it as a top-10 holding in his Cazenove Multi Manager Global fund, with the tracker making up a weighty 7.54 per cent of his portfolio.
It requires a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.15 per cent.
As he recently told FE Trustnet, Brookes is concerned that investors are becoming too over-confident about the economic backdrop and as a result are taking on too much risk.
Fidelity’s Trevor Greetham, for example, thinks that UK equities can repeat last year’s 20 per cent returns again in 2014. While Brookes isn’t concerned about a huge crash in the market, he says investors need to revise down their expectations.
“People are saying 'well if you adjust for this and you adjust for that, there are plenty of reasons to be bullish'. Effectively what they are saying is if you ignore all the bad news, then everything looks good,” he said.
“I don’t think we are heading towards a 2007-style economic wobble, but there is a lot of over-bullishness in the market,” he added.
Brookes and McDonald are renowned for selling out of their defensive holdings (such as Invesco Perpetual High Income) into more cyclical funds earlier than most, as they said the funds that hold more economically sensitive stocks (such as Fidelity Special Situations) offer much better value.
"Safety has been key for the last few years, but now I think this area is overpriced," McDonald said in September 2012.
"In 2011 it paid to be cautious, but since the fourth quarter of last year where cyclicals began to look cheap, I’ve moved out of the likes of Neil Woodford and into Sanjeev Shah."
That decision paid off as cyclical stocks have benefited tremendously from the more risk-on environment, as we can see by using Woodford’s fund and Fidelity Special Situations as proxies.
Performance of funds since Sep 2012
Source: FE Analytics
While Brookes is concerned that the rally in cyclical stocks is due a breather, he says that as defensive funds have still performed well, then they could also be prone to a correction. He says this presents investors with a problem. Bonds are one area where Brookes is reticent to invest.
He is particularly bearish on the sovereign debt market and describes Treasuries and gilts as the “world’s most devious investments” due to their still very low yields. To mitigate his fixed income exposure, Brookes has tended to maintain a very high cash exposure within his funds.
For example, his and McDonald’s five crown-rated Cazenove Multi Manager Diversity fund has a hefty 25 per cent cash weighting.
The two managers have headed up the £1.3bn fund since October 2007.
According to FE Analytics, over that time it has been the 10th best-performing portfolio in the IMA Mixed Investment 20%-60% Shares sector with returns of 37.81 per cent, beating the sector average by 17 percentage points.
Performance of fund vs sector since Oct 2007
Source: FE Analytics
It has also been a top-quartile performer over one and three years. It has, however, dropped into the third quartile over five years, which is primarily because of the fund’s bottom-quartile returns in 2010 and its third-quartile returns in the rebound year of 2009.
The fund has an OCF of 1.59 per cent and requires a minimum investment of £1,000.
