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This article was originally published on Citywire on December 14th, 2022
Elston Asset Management has started adding duration into its portfolio but only with fund managers that have flexibility.
Elston portfolio manager Leon De Wet said he was more comfortable with where government bonds were along with indicators saying inflation would be lower in 12 months despite a tougher economic backdrop.
De Wet said duration was starting to be added to portfolios from a very underweight perspective compared with the benchmark.
‘We do like active managers that have flexibility and have shown historically that they are prepared to move their portfolios as market conditions change,’ he said.
‘We’re possibly looking at adding managers that have much higher benchmark duration exposures but with flexibility to move around.’
Up until recently, the portfolio had managers that were predominately invested in floating rate credit and had limited duration exposures and general flexibility. Elston was invested in a relative value manager that had very low duration until five months ago when they sold the manager.
‘We sold that relative value manager and just bought a government bond ETF with a duration of five-and-a-half years. This immediately raised the Australian fixed income component of our portfolios,’ he said.
Using an ETF was deliberate as it was easy for the team to trade, execute and immediately get duration exposure.
‘We haven’t made a decision to sell it yet but at what point in time do we look at switching what was a tactical beta ETF allocation into an active manager that we are then probably going to own for a longer period of time?
‘We’ve also got a manager within our international component trying to perform cash-plus with little duration. We’re probably looking at selling that manager and switching into a manager that still has flexibility because we don’t have on-the-ground expertise and we take the big picture views on credit, duration and regions. But the managers are obviously seeing the individual securities and they’re a lot closer.’
Favourite funds
De Wet said one of his favourite funds was the Janus Henderson Tactical Income fund, which has returned -2.2% over the year to 30 November 2022 compared with its 50% Bloomberg AusBond Composite 0+ Yr benchmark return of -3.41%.
Over five years the fund returned 1.54% compared with its benchmark, which returned 0.95%.
‘They’ve been exceptional with managing one of the most difficult fixed income environments and they’ve delivered really robust returns and have downside protection,’ he said.
The fund’s manager, Jay Sivapalan, recently told Citywire that investors would redirect more of their investments towards certainty such as government bond coupons or cash flows.
But the Citywire AAA-rated fund manager warned the most important part of managing portfolios over the next five years was the ability to be nimble and active in fixed interest, especially in interest rate management, or duration, and being sensitive to which pockets of the corporate debt market the portfolio is exposed to.
Equity funds De Wet said he liked were Elston’s own Australian Large Companies fund and GQG Partners Global Equity fund.
‘Although past performance is not an indicator of future performance we’ve liked Rajiv Jain’s [GQG chief investment officer] thinking around managing his sector allocation. We’ve had them in the portfolio for an extended period of time and we’ve been pretty pleased with the way they’ve gone,’ he said.
Over the year to 30 November 2022 the GQG fund returned 7.29% compared with its MSCI ACWI ex Tobacco Index return of -6.16%. Over five years the fund returned 14.54% compared with the index return of 9.21%.
Elston Australian Large Companies fund returned 10.48% over the year to 30 November 2022 compared with its benchmark return of 6.96%. Over three years the fund returned 6.72% compared to its benchmark return of 6.44%.
Outlook
Going into 2023, De Wet said his team would be more cautious heading into the new year and were keen not to overpay for potential growth.
‘I also can’t help but wonder whether emerging markets, and China in particular, story has run its course. Even though it’s given us a bit of a bloody nose in 2022, I wonder whether it might actually turn out to be an opportunity in 2023,’ he said.
‘Hopefully we start seeing the signs of some sort of normalisation there and maybe an opportunity for us to make some money for clients.’
Elston has $4bn in assets under management and consists of two separate businesses: Elston Asset Management and Elston Private Wealth.
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