The recent months have been painful for most investors as the correlations between asset classes (which have been building up for a number of years) left many with nowhere to hide during the risk-off conditions. 
The consensual view was that equities have been falling as a result of a fear over a ‘hard-landing’ in the Chinese economy. However, many suggest that it was only a catalyst for a correction that has been long overdue thanks to years of strong returns following huge amounts of central bank intervention.
Richard Scott and Daniel Lockyer, who head up the Hawskmoor Distribution and Vanbrugh funds, sit in the latter camp and have been ‘de-risking’ their portfolios for a number of months now due to the high valuations across global financial markets.
Using data from FE Analytics, they show that the characteristics of the recent correction supports that view given all areas of the market were hit by hefty selling.
Source: FE Analytics
“What you are looking at here is a table of market movements over the worst of the sell-off during August ending on the new ‘Black Monday’,” Scott (pictured) said.
“Although the trigger for the downward lurch in equity prices was China, by no means was the sell-off restricted to China. In fact, some of the movements such as in continental Europe were even worse than we saw in China.”
“The overwhelming message from this table was that it was an indiscriminate sell-off with prices being marked down across the board. For instance, in the UK you couldn’t hide in defensive sectors in fact they sold off just as much as the cyclical areas.”
Scott and Lockyer have also been negative on traditional fixed income assets for some time and they point out that many areas of the bond market were also caught out during the correction.
“If you look at other asset prices during this period it wasn’t a time when government bonds proved to be a safe haven. A few very long-dated government bonds went up a little bit in value, but because there was quite a bit of selling pressure by emerging markets reducing their foreign exchange reserve most of them didn’t turn out to be a great hedge.”
According to FE Analytics, while every fund in the IA UK Gilt sector managed to eke out a positive return during the period in question, 70 per cent of IA Sterling Corporate Bond funds and 82 per cent of IA Sterling Strategic Bond funds lost money.
As can be expected, every IA Sterling High Yield fund ended the period in negative territory.
Performance of bond sectors during the correction
Source: FE Analytics
In fairness to the team at Hawksmoor, they have been preparing for such an event for a number of months now.
In March this year, Scott and Lockyer’s co-manager Ben Conway told FE Trustnet that it had never been harder to build a cautious diversified portfolio due to the increasingly high correlations between bonds and equities.
“You cannot lose sight of fact that the current environment is unprecedented. These are ridiculous times, absolutely ridiculous,” Conway said.
“This is what happens when the yield curve is so flat and a high proportion of government bonds have negative yields. You have to take a step back and you shouldn’t listen to people who claim they know how markets will perform because no-one knows how it is going to pan-out.”
He added: “It’s never, ever been harder to build a diversified and cautious portfolio.”
Therefore, to try and protect their investors the team have attempted to ‘de-risk’ their portfolios by reducing beta. This has included selling top-performing portfolios such as Artemis Global Income among others.
Most of those profits have gone into funds with an absolute return mandate, with the managers now owning the likes of Henderson UK Absolute Return, Odey Giano, Old Mutual Global Equity Absolute Return and Jupiter Strategic Reserve.
However, one fund that has protected them phenomenally well has been James Clunie’s Jupiter Absolute Return fund, which ground out a 1 per cent return with very low volatility during the correction.
“We have been gradually reducing beta and as part of that theme we have been adding to absolute return funds and we have been doing a lot of work on the types of funds and managers we want to allocate to,” Lockyer (pictured) said.
“When you have extra elements to the portfolio such as shorting or reading the macro environment then you need a talented manager with plenty of resources and all of the funds are doing a very good job for us.”
“We are particularly pleased with the performance of Jupiter Absolute Return, which is one we have been following for a while and we introduced into the portfolios only a few months ago.”
Following his departure from SWIP, Clunie took charge of the now £200m Jupiter Absolute Return fund in September 2009.
He invests in equities, equity-related securities (including derivatives), cash, near cash, fixed interest securities, currency exchange transactions, index-linked securities, money market instruments and deposits.
Our data shows that since he has been at the helm, the fund – which aims to deliver positive returns over rolling three-year periods – has returned 6.5 per cent. This is almost the exact same gain as the FTSE All Share, although Clunie’s fund has been four times less volatile and had a maximum drawdown which is four times less than the index.
Performance of fund versus index under Clunie
Source: FE Analytics
Lockyer says there is one major reason why the fund has performed so well recently and why they will keep Jupiter Absolute Return within their portfolios.
“Clunie had been reading the market extremely well and introduced a position which was a short on the Chinese currency,” Lockyer explained.
“It shows he was taking a contrarian view. It was so contrarian that even when we spoke to somebody in the Hong Kong office at Fidelity just before the market set-back and he said there was no chance that the Chinese would devalue.”
“The reason Clunie was able to put that position on was because that view was commonplace and no one expected that to happen. He could put it on relatively cheaply and the returns it has generated have been very good.”
“Who knows, they may be some more devaluation ahead but it is something we are glad to have exposure to, to offset that potential situation.”
Lockyer and Scott have managed their Hawksmoor Distribution and Vanbrugh funds, which both carry five FE Crowns, since launch.
The oldest is the £64m Vanbrugh fund, which is the lower risk of the two as it sits in the IA Mixed Investment 20%-60% Shares sector rather than the IA Mixed Asset 40%-85% Shares sector like their Distribution fund.
According to FE Analytics, Hawksmoor Vanbrugh has been a top decile performer in its sector since its launch in February 2009 with returns of 97.02 per cent, beating its FTSE WMA Stock Market Income benchmark by more than 20 percentage points in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
It has beaten its peers in three out of the last five calendar years and is outperforming so far in 2015. While it has had a higher maximum drawdown than the average over that time, it is top decile for its risk-adjusted returns (as measured by its Sharpe ratio) since inception.
The fund currently holds 41 per cent in equities, 27.6 per cent in bonds, 12.4 per cent in absolute return funds, 5 per cent in convertibles, 4.5 per cent in property and 5 per cent cash. Its top 10 holdings include Royal London Short Duration Global High Yield Bond, Fidelity Global Dividend and CF Miton UK Value Opportunities.
Hawksmoor Vanbrugh has an ongoing charges figure of 1.95 per cent.