Multi-asset investment strategies come in many guises. Some aim to deliver a positive return in all market conditions; others a volatility outcome. For James Klempster, head of portfolio management at Momentum Global Investments, both these approaches have limitations, potentially forcing investors to use expensive derivatives to achieve a positive return, and/or to minimise volatility over every time period.
Instead, the Momentum portfolios focus on the outcomes that are more in tune with investors’ long-term goals. This influences the investment make-up of the three Momentum Factor funds run by Klempster.
The funds use the consumer price index plus 3-5% as a benchmark and seek to invest in ‘real assets’, typically bonds, shares, commodities and alternatives, with asset allocation actively managed through the cycle. This approach is designed to deliver smoother returns and should be better aligned to clients’ real-world needs, such as inflation-adjusted income and/or long-term growth.
It means the funds will always tend to have a full weighting in equities, but Klempster will move the allocation around based on available opportunity. “The majority of our equity is in the UK – up to 80% in some of the funds. We believe this is the best way to hedge UK inflation over the long term. Also, the UK stock market is global in focus so is well-diversified in itself,” he says.
Within UK exposure, Klempster blends different style exposures rather than giving the portfolios a significant tilt. As such, he tends to hold weightings to deep value, momentum and quality-focused managers. “We tweak at the margin but feel it is more important to get a basket of good managers.”
In building the portfolios, he largely uses funds but will have a number of direct holdings as well, usually in specific niche areas such as Reits.
He also blends active and passive funds. The majority will be actively managed but there will be areas where active managers struggle to add value, such as high quality bonds or where he needs shorter-term exposure. The group has a strong manager research function on which Klempster draws.
He says: “We meet managers frequently. We want to make sure they have the structures in place to allow their philosophy to flourish. They need both corporate and analyst support.
“We have a lot of proprietary software that looks back at managers’ trading activity over time, to understand the characteristics of the fund – what they buy and sell.
“We also want to make sure a manager remains true to their style. The problem for us is when they try and chop and change through the cycle, as it becomes difficult for us to understand the risks we are taking.”
Across the board, Klempster is valuation-driven. He has the scope to shift the asset allocation within different sectors, markets or sub-sectors. “The most prominent sector position is our weighting in gold producers. We initially bought gold passively when the gold price started to hit new lows. It has done well for us, year to date.”
For the most part, however, Klempster is taking regional rather than sector bets. For his global exposure, he has a holding in Japan, hedged back into sterling. He also has continental European and emerging market positions and a significant underweight to the US. “The US is the least attractive market,” he says.
“All the good news seems to be priced in. The UK, Europe and Japan have underperformed substantially and are not as well priced.”