IFA Magazine recently spoke to Ninety-One’s John Stopford and Jason Borbora-Sheen. John is head of Multi-Asset income at Ninety One and, along with Jason, they are co-managers of the Diversified Income Fund, one of the flagship funds in the Ninety One stable. We talk to them about the fund, about income investing more generally as well as how they operate in today’s ever-evolving market environment
IFAM: Could you give us a brief overview of the investment strategy you operate for the Diversified Income Fund?
John Stopford: With this fund, we’re looking to deliver a defensive total return – ie a moderate return with low volatility and reasonable predictability over time. Of course, the key driver of that return for us is income -after all, it’s the part of the total return that you know the most about.
If you’re trying to deliver a reasonably predictable, repeatable return, as we are, then relying primarily on income lends itself to that. We target an attractive level of yield, something consistent with what we think the market can currently pay. But, importantly, we focus on resilience at the underlying security level too. We’re looking for predictability of income as well as outcome. We’re trying to do all of that with a defensive level of risk – with lower volatility than global equities generally. That has meant that people have typically used the fund as a defensive building block or possibly, more recently, as an alternative to fixed income within a client’s overall portfolio. That’s because we have a similar sort of risk profile and similar sort of return objective but we’re using a wider range of assets.
IFAM: You’ve certainly navigated many challenging market conditions throughout your tenure of the fund. What’s that experience been like?
John Stopford: We have always had -and always will have – a defensive mindset. We care about protecting capital as well as growing our clients’ assets and this manifests itself in how we run the strategy. I think this differentiates us from many other multi-asset strategies which often look to generate high returns rather than consistent returns. They are typically much more focused on making big asset allocation calls. That can be done of course, but it’s very hard to do consistently.
We think the big opportunity in multi-asset investing is from the bottom up – ie at the security level. Whereas there are just a handful of asset allocation calls you can make. At the security level, when investing globally across multiple asset classes, we believe there are around 25,000 tradable securities to choose from. That gives us a lot of choices, particularly if you know what you’re looking for.
Given our defensive mindset, we’re always looking for the same thing: those individual securities that have an above-average level of yield, but that yield is underpinned by resilient cash flows at the asset level.
We’ve then got a high degree of confidence in getting that income when we need it and at a reasonable price. That combination of resilient income and reasonable valuation gives us a lot of protection to the downside. When things happen in the world, it’s a very effective way of providing protection as these are simply more predictable securities to own.
But then on top of that, we try to make sure that the portfolio is diversified. It’s important that we own a range of securities that are going to behave differently at times of each market cycle. We also focus on behaviour rather than asset class labels and actively look to de-risk the portfolio in more difficult market conditions.
You asked how we’ve dealt with turbulent times; it’s been some combination of having an appropriate level of risk in place, but also owning securities that naturally, themselves, are relatively defensive in nature. In difficult times they hold up better. We’re also quite quick to de-risk the portfolio in times of market stress. We managed this effectively in 2015-2016, when people were generally worried about the state of the global economy.
In 2018, almost all asset classes lost value but we managed to eke out a positive return on the fund despite that, because all of those factors worked well for us. In 2020, during the Covid-19 pandemic, we de-risked the portfolio pretty aggressively. It’s not just about taking risk off, it’s about looking for the opportunity to add a little bit back at the right time.
For us, 2022 was all about protecting, owning less in riskier assets and in many safer assets too. The year was characterised by some of the traditionally less volatile and lower risk elements of the investment universe behaving very poorly, as readers will be all too aware.
I’d sum it all up by saying that for us, it’s about being able to run less risk, to own more predictable underlying assets, to look for opportunities to add risk back when it’s appropriate and having a very flexible global mandate. All of those put us in good stead to manage through what has been already a pretty volatile ten years with so many ups and downs. We think that things could be similarly volatile and eventful over the next ten years though!
IFAM: What are the biggest fund management lessons that you’ve learnt over the years?
Jason Borbora-Sheen: There have been quite a few. Speaking personally, from the last ten years, in the good times you have this dynamic whereby things can work, but you don’t necessarily understand why. It’s during the harder times that they can start to display their true character.
In my view, operating on rules of thumb can end up being quite a painful experience, trying to understand more fully what you own. I think being bottom-up can help in that regard. But bonds aren’t always going to diversify – as we’ve seen in 2022. We always need to look ahead and contemplate how things could be different in the future and what that means for the assets we hold.
I think precision is very important and that’s something you keep on learning. Patience is another important aspect of what we do. Sometimes you can feel like you’ve made the wrong call and therefore want to reverse what you’ve done. But, you need to have that
resilience to sit with a position for a period of time. That way, as always, your reasons remain intact, and what you were hoping to achieve can come to fruition.
In 2021, for example, we were quite cautiously positioned. There was a real temptation to then say, “the market seems to be doing really well, we should be more aggressive.” But if we had done that, then 2022 would have been a much more painful experience for us. We continue to learn as we go through and always try to improve what we do for our investors.
IFAM: Why do you think that the more resilient income and defensive returns are so relevant for investors in today’s environment?
Jason Borbora-Sheen: I’d argue that they’ve always been very important. If you look historically at the contribution from an income, whether it’s from a dividend or buybacks it’s been the dominant form of return, relative to capital gains, for the majority of asset classes, whether they’re fixed income or equity.
I believe that some investors might overlook this. Some are probably asking, “can I buy a share for £10 today and sell it for £20 in ten years’ time?” and less on “can I buy a share for £10 a day, and get 50p each year thereafter?”
That’s the importance of income that’s often overlooked. It sets you in a place where you are compounding potential returns. It’s particularly relevant now because yields have risen quite a bit.
Of course, we’ve seen a big reset on a fixed income, we’ve seen it equally on some equities – and significant resets too. I don’t think that means you blindly buy it, but it does mean that prospective returns are higher. The yield on our fund is the highest it’s been for many years. That’s quite a compelling place to be starting from. Yes, there are concerns around yields and inflation, but I think it’s an interesting place now to be starting to take some risks. Ultimately, if you can be flexible in that, you’ve got a good chance of making returns.
John Stopford: I think investors typically think about fixed income rather than more generic income. There may be times when fixed income isn’t always the best way to take income. Having the flexibility to look beyond fixed income for income opportunities, but still with a defensive mindset, I think is quite an interesting angle which we think is very relevant.
The other aspect might be that we’ve lived in an environment since the global financial crisis where big drivers have been acting on markets, and markets themselves have maybe been less liquid, more volatile. There have been quite a lot of events that have caused big market moves – up and down.
In that kind of environment, having more of a defensive mindset, not basically experiencing as large a drawdown as often as you might, we would say, is quite a valuable characteristic. You need to think more about how you protect the downside in the future than you did up until a few years ago.
IFA Magazine: How is the portfolio positioned? And where do you expect to find the most interesting investment opportunities during the year ahead?
John Stopford: We believe 2023 will be somewhat different to 2022. 2022 was primarily characterised by very high correlations across asset classes. There have been few places to hide. For 2023, the movement between different asset classes will begin to break down a little bit because you’re moving into an environment where the growth outlook globally continues to deteriorate and that will impact what central banks do.
Government bonds have sold off on higher interest rates. In some economies, those interest rates are now beginning to cause housing downturns and squeeze consumers where there’s more leverage.
Australia, Canada, and New Zealand look especially vulnerable to higher rates, which also means that their central banks may have to cut rates sooner. So those bond markets could be interesting for investors. Also, you’ve seen the credit market sell-off. Some of those still look too expensive. They’re not pricing in maybe enough risk that profits fall next year in a number of countries and economies and you get more risk of a downgrade in default.
There are some economies that look out of sync with others. China might be beginning to recover as the rest of the world is deteriorating. There may be opportunities at an individual stock level and an individual equity level.
I think it’s going to be a year where you need to be a bit more nimble, a bit more adaptable, and maybe move around in terms of where the opportunities sit rather than seeing everything moving up and down together.
Jason Borbora-Sheen: One place which really didn’t participate in the monetary and liquidity-driven bull market from 2020 to 2021 was equity income. The historical experience post-GFC was Central Banks trying to fight to get inflation up.
Market leadership was driven by growth stocks and income lagged for a long time. I think we may be in a slightly different place now. But not just for 2023; I think this is potentially pertinent to the longer cycle ahead of us. You may see a reversion to value from growth and to income stocks outperforming lower-yielding equities.
IFAM: What would you say are the main strengths of your investment approach?
Jason Borbora-Sheen: One is definitely our willingness to be flexible and to take risk off when others are seeking to add it in at different times in the market cycle. In 2015 and 2016 for example, there was a more traditional manufacturing sector weakness. 2018 had quantitative tightening, which is very different to what many of us had seen before 2020. And then 2022 was a mixture of those factors.
I think the last ten years have seen quite a lot of action underneath the surface, even if at the headline it has often seemed like it’s quite calm waters. Having an adaptable and flexible toolkit is important in that context.
John Stopford: For me it’s about having an approach where we know what we’re looking for all the time. It’s well-defined and we know in what circumstances we would de-risk or re-risk the portfolio and the level of risk we’re looking to run.
Having guideposts in a world that is pretty noisy is incredibly helpful. It means that you know what you should be doing all the time, and you don’t get sucked into the latest fad or the latest trend because it doesn’t fit with the approach.
For us, every single security we invest in has got to meet three characteristics; an above-average yield, resilient cash flow underpinning the yield, and reasonable valuation. On top of that, our overall portfolio has to have a balance of securities that are going to give us diversification when we need it.
Finally, we have a number of signals to help us decide how much risk to run at any moment in time. This means we can de-risk in a timely fashion if the world becomes more challenging and then we can regress a little bit, but still remain defensive when things settle down.