'How We're Balancing Risk and Return'

VIDEO: Running a multi-asset fund isn't as simple and investing in bonds and equities when markets are volatile, says Ninety One Diversified Income manager Jason Borbora-Sheen

Holly Black 24 May, 2021 | 11:36AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jason Borbora-Sheen. He's manager of the Ninety One Diversified Income Fund. Hello.

Jason Borbora-Sheen: Hi, Holly. How are you?

Black: So, Jason, I'm well, thank you. Would you like to tell us briefly what the fund does?

Borbora-Sheen: Sure. So there are three interlinked objectives for the Diversified Income Fund. Firstly, we're trying to produce defensive returns. And that for us means capturing more of the upside, relative to downside, and through time that allows our investors to compound a compelling risk adjusted return. Most of that overall return is going to come from the yield of the fund. So we buy securities with above average levels of income, whether they're equity or fixed income based. And we then look to use that as a driver of returns, we think that often, investors focus a lot on share prices, as opposed to the dividends or coupons they could receive, but actually through time, compounding income is a very, very, very strong driver of returns across asset classes. And the final thing that we're doing is achieving those returns with less than half of the volatility of equities. So that's our risk parameter for the strategy.

Black: So what's your mix of bonds and equities at the moment? Because we know that dividends have been, you know, hard place to find decent yields, but so have bonds?

Borbora-Sheen: Yeah, I think that's absolutely fair. We've got, I think, a slightly different approach, perhaps, to traditional multi-asset funds in how we put the portfolio together. So there are three stages to constructing the fund. The first is individual security selection, and that actually occurs completely agnostic towards the asset class. We look for three characteristics. So we look within the asset class for securities that have got higher than the average for that asset class. But we're then trying to find resilience. And for that, we're basically looking, for example, if it's a corporate security. The profitability of the company, leverage of the company, the historical ability to meet its dividend or coupon payments. And combining those together then with valuations allows us to achieve a balance of three competing factors, which effectively is yields, reliability of that income stream, and then capital stability.

So the traditional sort of fixed income versus equity weighting question actually comes in much less to this fund than you might expect. And that's simply because it can be somewhat misleading to focus on that division. Instead, what we tend to look at is, where can we find that mix of characteristics in a way which allows us to achieve the outcomes of the fund. And currently, I would suggest that equities are more right place to look for that mix of characteristics than in most defensive bond markets. But actually on a risk adjusted basis also more attractive than relative to riskier fixed income markets, like credit or like some of the emerging markets.

Black: So I think the appeal for many investors with a multi-asset fund is you make the decisions for them. You decide how to navigate the market, and that's particularly helpful in periods of volatility, which the past year or so has definitely thrown up. So how have you handled that volatility?

Borbora-Sheen: I think the last year was a very challenging environment, because you had a significant and quick sell off in equity markets, coupled with a big move out in credit spreads within fixed income, and actually quite substantial volatility within even defensive government bond markets during the sort of peak of the Coronavirus scare in March of last year. That we think took a lot of investors by surprise, and we wouldn't at all, try to claim that it didn't take us by surprise. However, we were somewhat more cautiously positioned at the beginning of the year, as we thought that the potential for recession not related to Coronavirus at all but simply to the length of the economic cycle at that point was more high than it had been.

So that had led us to have a reduced exposure to riskier credit markets, and somewhat hedged equity exposure. That markets then had sold off quite aggressively. We're protected against that drawdown. So whilst the market was off around 40%, the fund was off just about 10%. And we then unhedged the strategy and participated in the recovery of markets. And we also then had added to credit exposure, which when credit spreads were very wide looked appealing. They then narrowed significantly, and we gained from that move too, leading to what was actually a very good year for us in terms of producing both income and capital gains.

Black: Fantastic. Jason, thank you so much for your time. From Morningstar I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk


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