Fund Manager Q&A: Miton Cautious Monthly Income Fund
As part of our ongoing client communications, our team like to post a Fund Manager Q&A from time to time, in an effort to give a little insight into the processes involved in investment management and to throw some light on what concerns you may or may not have. With the financial marketplace experiencing such unprecedented upheaval, we know that investors are keen to learn of more prudent and low risk investment options. In our recent Market Update, we explained how our Investment Committee is working continuously to adapt our portfolios to accommodate and protect against the global fluctuations.
This month, we hear from the fund management team at Miton Cautious Monthly Income Fund and hope you will find this both an interesting and timely read.
- What is the approach to running the Miton Cautious Monthly Income Fund?
MI Miton Cautious Monthly Income Fund is a directly invested outcome driven fund. It is run on macro and thematic lines seeking opportunities from relatively short term macro trends and longer term structural thematic changes by buying diversified ‘baskets’ of investment ideas. This enables exposure to the investment idea without taking undue stock selection risk.
- Is your low volatility approach the only viable option for low risk investors in the current environment?
A mixed asset strategy, particularly an actively managed, directly invested, strategy enables the manager to flex the allocation to adapt to different market conditions. For example, by building government bond exposure in anticipation of economic weakness or taking advantage of market falls to rebuild equity exposure. This should lead to lower volatility over time than a fund invested in a single asset class such as equity or a passive or less active multi asset strategy.
- How can you control costs given lower return expectations?
As the fund is directly invested it has materially lower costs than a comparable fund of funds as there are no third party manager charges. We aim to minimise all costs where appropriate. Obviously returns would never be sacrificed simply to show a lower charges figure. Transaction costs are regularly monitored and negotiated where possible.(n.b. the fund has a small exposure to listed investment companies where there is a manager charge).
- If markets were to suffer another sharp fall in value how would the fund be positioned?
The fund is currently defensively positioned relative to most periods in its history. While the rapid falls in markets are probably over bear markets, generally they take a period of time to work their way through the system. In the current case we would expect a series of profit warnings and corporate failures to weigh on markets until the outlook is clarified.
In the longer term, we expect to rebuild our equity positions over time taking advantage of the substantial liquidity we currently have in portfolios.
- If the coronavirus persists, what assets are likely to be increased in the portfolio – can they apply protection in the form of short positions or merely by diversifying asset allocations?
We do not use derivatives for investment purposes, only for efficient portfolio management (e.g. to gain quick exposure to asset class before investing in individual bonds or equities).
See above – we retain a very reduced equity exposure already and therefore, are more likely to take advantage of further falls to reinvest our cash and near cash.
- Which market sectors and indicators are you following for falling/rising market ideas – is the UK as undervalued as some suggest?
We monitor a broad range of indicators: economic, market valuations and trends. Our process seeks to invest into trends in sectors and asset classes that are supported by fundamental factors. At present, the trend remains clearly bearish, outperforming areas remain those least exposed to economic activity such as utilities, healthcare, and fast-moving consumer goods. We will look to rebuild more cyclical positions should they start to build some momentum rather than anticipating a turn as we don’t believe we can predict the future with any confidence.
In terms of the UK, its exposure to some highly impacted areas, such as energy, resources and financials has meant it has performed very poorly during this sell off. In the long term, these areas remain out of favour, not least because of the long term trend towards ‘ESG’ investments. However, as pragmatists we recognise that ‘value’ type sectors and markets often perform very well in the early stages of bull markets and should such a trend develop, we would be comfortable building a substantial weight in UK assets again.
- The value of investments will fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
- For funds investing globally, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
- Changes in interest rates will affect the value of, and the interest earned from bonds held by the Fund. When interest rates rise, the capital value of the Fund is likely to fall and vice versa.
- The Fund does not use derivatives extensively, although it may use them in an attempt to reduce risk, reduce costs and to generate additional income. Investing in derivatives carries the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions. Derivatives may expose the Fund to credit risks of counterparties, who may not meet payment obligations. The use of derivatives may result in the fund being leveraged (where economic exposure and thus the potential for loss by the fund exceeds the amount it has invested) and in these market conditions the effect of leverage will magnify losses.
- For MI Miton Cautious Monthly Income only fees will be deducted from capital which will increase the amount of income available for distribution; however this will erode capital and may constrain capital growth.
- Forecasts are not reliable indicators of future performance.
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