Matthew Bance is UK strategist for UBS Global Asset Management. He works on UK funds, including the Multi-Asset Income fund, for which UBS launched a local authority share class in June. The fund seeks to provide income of Libor+3% and has gathered several LGPS fund clients since coming to the market.
Room 151: What is this multi-asset fund aiming to do, and for who?
Matt Bance: In the UK in general we have three key funds and a large book of institutional business. We get involved in the design of bespoke segregated accounts and have some big UK balance accounts for UK local authorities and pension funds.
Multi-asset is trying to focus on the outcome of the fund, specifically to try and deliver cash plus 3% income. We invest across different asset classes, so actively allocate toward asset classes that will help us achieve our income target or help control the volatility of the fund.
What is important from our point of view is you can target very high levels of income if you want, but doing that would involve taking on a degree more investment risk. We’re trying to achieve the income but do it in a manner that won’t erode the value of the capital, and trying to keep the volatility of the fund relatively low.
Room 151: What is your asset allocation?
MB: We’re fairly flexible in what we can invest in but we do have guidelines. We’re not allowed to hold more than 40% in non-interest bearing securities so have to hold at least 60% in fixed income or cash. The fund is structured as a bond fund so what that means for non-taxpayers like treasury managers for local authorities and the like is that they will continue to receive gross interest, as if they were investing in a money market fund or something like that.
Also it provides an element of comfort to those investors who are going into this sort of fund who don’t have experience of some of the different asset classes.
At the moment we have 22% in equities, 4% in real estate, around 8% in alternative income sources (which includes infrastructure and insurance-linked securities). In fixed income we have 10% in corporate bonds, 29% in high yield, 7% in mortgage-backed, 12% in index-linked, then the balance is in cash.
Room 151: Do treasurers, who tend to like slow and steady in terms of income, worry when they see that sort of breakdown? With high yield and real estate it looks a bit more exciting than it initially sounds.
MB: Yes, I think for treasury managers we’re very clear that this is only suitable for someone who is willing to invest across an investment cycle. When we have spoken to clients and prospects people say they do have money that they don’t intend to use for a number of years. And many have a target return to achieve with the pot of money that they have and the traditional instruments that they have been using haven’t got them anywhere close to that.
We have discovered that some clients were going into different asset classes, treasurers were going into property funds, equity income funds, but there was a degree of unease on their part because it was a venture into the unknown, and they were forced into making asset allocation decisions themselves: when to go into a market; what to go into; when to exit. The appeal of this fund is that they outsource those decisions to us.
Room 151: How do they feel about nearly a third of the fund being in high yield and nearly a fifth in equities?
MB: We opened the share class aimed at this market back in June and since then we have onboarded three or four clients and had conversations with a number of others. For the most part they understand it because we see ourselves as much less risky than an equity income fund, for example, and in our conversations we found that they’d allocated to equity income funds, or property funds, where there is less liquidity.
The market does seem to be very polarised. Some managers wouldn’t feel comfortable with these kind of funds, but when they are able to take a view over an investment cycle, in the order of three years, they have been very relaxed about doing so, and this is a small part of their overall pot.
Room 151: The minimum investment is £1m, are people investing around that mark?
MB: Yes, around the minimum. The view that some have taken is that this is a comparatively small fund and given that this is fairly new for some they are comfortable putting some money in, seeing how it goes and almost pound-cost averaging over their stage of investments.
The fund has achieved a capital return since the share class was set up in part because markets have done well. In terms of the principal focus of what we are trying to do, which is the income part, they receive their first full quarterly interest payment and it is on track to be 3.8%: in line with our targets.
The fund has been going for four years and has been in line with its targets over that period as well. Clients, I think, have been pleased with the experience as well.
Room 151: How would you explain the risk profile of the fund to an elected member?
MB: In the long term we expect a risk profile of around 5-8% volatility. That’s about equivalent to corporate bonds or around a third of equities. I would say that there might be a temptation for some who have moved into corporate bonds over the last years where it has been an extremely favourable environment.
We’re able to manage the duration within our fund. At the moment it is around 2.6 years. Corporate bonds in the UK index in particular tend to be heavy in duration, maybe eight years or so. If an environment of rising rates is feared, corporate bonds are going to suffer significantly in that environment, but we are able to position the fund more conservatively in terms of the duration exposure it has.
We have some shorter-dated bonds in there but if you contrast corporate bonds to high yield bonds it is interesting to see that corporate bonds have significantly more duration, although they are perceived as less risky in terms of likelihood of default. So in the event that yields do go up corporate bonds would fare worse than high yield because high yield bonds have higher coupons and typically shorter maturity of assets.