Creating a one-stop shop for investors can be a tricky prospect, with many moving parts to consider from macroeconomics and short-term political factors to picking the best funds over the long term and making sure those underlying managers own the types of stocks you want to be invested in.
The team at Jupiter behind the Merlin range of funds have an enviable track record of this. Indeed, the Jupiter Merlin Growth Portfolio – the most high-risk portfolio in the range – has beaten the average IA Flexible Investment peer by round 46 percentage points over the past decade.
This week Trustnet spoke with co-manager David Lewis about why the portfolio no longer invests in China, why buying agricultural ETFs does not work on ethical grounds, and how he deals with owning the big oil companies.
Total return of fund vs sector over 10yrs
Source: FE Analytics
What is your process for building the portfolio?
What we are trying to do is offer our clients a one-stop-shop portfolio that can be a good fund for all seasons. We look to buy the right amount of the right people at the right time with a bias towards quality managers that have the ability to defend on the downside and maximise returns given the risk taken in the portfolio.
The macroeconomic backdrop guides our asset allocation but the actual picking of the funds is based on a number of areas including screening of the market, a log of funds that we have looked at in the past and a network of sales people that we can rely on who know what we are looking for. These offer up ideas at different times and then we do our due diligence.
How risky is the fund?
The Merlin Growth portfolio sits in the IA Flexible sector which means we have the ability to move portfolio wherever we want to go. It is the top of a stack of portfolios that we run based on risk tolerances so it is created to be at the riskier end of our spectrum.
It is predominantly invested in equities but there are some mitigating factors in there, such as modest-to-no exposure to the blue-sky, high-growth end of the market, as the funds we invest in have valuation disciplines. We also don’t own the deep value end of the market.
Over the past 20 years we have broadly captured around 110% of the upside versus the peer group, but also defended capital on the downside as well.
What has been your worst call this year?
The biggest detractor has been our Asian and emerging market exposure. At the start of the year it was probably around a 5% exposure.
There has been a point of discussion for a number of years over the exposure to China in these funds. From the start of the trade war between the US and China we have questioned the idea of having exposure to the Chinese equity market and the clampdown by the [Chinese Communist Party] CCP was the final straw for us.
We feel like the mood music is very much away from those minority shareholders, which we are always going to be. We do not feel that our interests are going to be looked after by investing in there.
And what about the best?
We decided to invest in some dedicated technology holdings in November of last year and that has been great. The Bluebox Global Technology fund is up about 32% so far this year and it has been a significant winner for the portfolio.
Why do you own gold?
It is a small holding in the portfolio. We have held physical gold for more than 10 years in varying degrees. In March last year we turned up that weighting significantly which helped preserve capital on the downside, but then saw this disconnect between gold shares and gold.
Gold had held up well but gold miners had cratered, which we thought seemed crazy, as oil is the main input costs for the companies and the price had gone negative on some metrics.
We bought into a significant amount of gold shares which performed well until we got to the vaccine announcement, when we decided we wanted to be in more cyclical assets and tied to economic growth.
The weighting is still in there, however, as we believe it will perform in other scenarios, but we are aware that it is volatile and have to weight the exposure accordingly.
Owning a small part of something we may buy more of in the future is beneficial, as you naturally watch something much more closely when you have a small position in it.
How do you justify owning natural resources?
We brought in a natural resources fund in March this year. It is made up of energy companies, mining stocks and some agriculture firms. The energy companies have been significantly derated on the back of [environmental, social and governance] ESG concerns, but we are big believers that the recent fuel crisis is a great example that the world has not decoupled from hydrocarbons yet and are not going to do so for many years to come.
The big energy providers are going to be part of the solution and will allow the world to transition to decarbonised.
The materials side also plays into the decarbonisation theme as for the world to decarbonise you will need a vast amount more industrial metals and the only companies that provide this are the big materials companies. We think there is a huge growth story there as all of the major countries in the world try to decarbonise at the same time.
Is there anything you avoid?
We don’t invest in the standard things like cluster munitions and that kind of thing. But on an ethical basis we also don’t invest in ETFs that buy agricultural commodities such as grain because you are influencing the price that end consumers are paying, which could be important for their quality of life.
How do you incorporate ESG?
We are in the integrated camp. We analyse our underlying holdings so we can see where the red flags are and challenge our fund managers. We want our managers to engage with the companies however, rather than divest, and challenge them on this.
I think there are a lot of questions as to whether an exclusionary approach is the right way to do things. It means the oil and gas companies for example could be driven into the hands of private equity if no one wanted to buy them on the public markets. They wouldn’t have to report to the broader world about what they were doing and it could result in far greater emissions from these assets.
What do you do outside of fund management?
The answer would have been different a few years ago because at the moment my wife and I have two three-year olds and a one-and-a-half year-old toddler, so it is almost nothing that it is not related to cleaning, tidying, cajoling or encouraging our wee ones. But I also love the outdoors. Golf is one of my passions, although I’m not good at it. My wife is Swiss, so we’re really excited about teaching our kids to ski.