Partner Insight: The way in which bonds have been so successfully combined with equities in the past 35 years has been contingent on them delivering high returns in periods of equity market stress. Yet in half of the 20-year periods over the past 120 years, having duration instead of cash alongside equities has only dragged down risk-adjusted returns, according to Toby Nangle, manager of the Threadneedle Dynamic Real Return Fund.
For Nangle, the traditional approach of combining bonds and equities in a portfolio is not necessarily the best way to improve risk-adjusted returns; a key concern for him as he dynamically allocates his portfolio for the best returns.
Having recently celebrated its fifth anniversary, the Threadneedle Dynamic Real Return Fund has delivered a gross annualised return of 6.4% (5.4% net of fees) over five years to 31 August versus the UK CPI index return of 1.5%. Meanwhile, over five years absolute volatility has been at a steady 4.8% - some way below the two-thirds of equity volatility target.**
The manager has achieved this through close collaboration with the group's eight-strong Asset Allocation Strategy Group and in-house analysts, and by sticking to a disciplined approach throughout tougher time periods.
Nangle notes: "At the moment our portfolio is noticeably lacking exposure to government bond duration, simply because we believe there is a risk that this negative correlation [between bonds and equities] switches, and there will be poor returns coming from that part of the market."
The Fund also stands out from some of its peers due to the fact it is a long-only and unlevered product, which means it does not take any net short positions. The reason for this, Nangle says, is to help keep things simple and transparent.
However, this does not mean he does not employ tactics to manage the volatility. A good example of this is the Fund's investment process in the lead-up to the Brexit referendum and following the announcement of the outcome.
Nangle says: "When we reviewed the portfolio ahead of the referendum, we came to the uncomfortable conclusion that we had a big bet on the ‘Remain' vote; we had around 12% in European large-cap quality equities.
"But rather than liquefy all these stocks, we worked with colleagues in our risk team to find the best way to take out this risk.
"We did this by selling short EuroStoxx futures and a long euro/short sterling position on top of that, among a number of other trades. When the market opened on the morning of the results, it was pretty uncomfortable. But we went out and removed the EuroStoxx future, as this was to take us from the point of unknow to known.
"We then took advantage of some opportunities that appeared such as UK large-cap stocks that had been hit."
Click here to read the full article and learn how Toby Nangle has navigated a range of challenging market events and managed to deliver significant returns ahead of his peers.
