The school of hard knocks

The end of passive
It is the low-cost passive approach that Bonnor-Moris says has performed the best since launch, though he is less convinced this will continue going forward.

“I don’t know how long this market favouring passive investing will last, but we’ve seen it before, especially at the end of the ’90s, and we all know how that ended,” he says. 

“In a dislocated market around the world in the likes of the US, Europe, Japan, China and India, these events are not going to favour passive investing over the next few years.”

He adds: “We do have some active managers that have outperformed but the majority haven’t. Last year was a classic case, particularly in fixed income, where managers have underperformed rising benchmark returns. The best bet to make last year was 30-year US Treasury bonds but I don’t know a soul who thought that was the case at the time. Anyone who said they did is probably lying.”

A popular stance for wealth managers today is to be ‘cautiously optimistic’ and Bonnor-Moris is no exception in this regard. He sees the possibility of another year of reasonable returns, but with danger ahead. “We tend to have a fairly long-term strategic asset allocation that is quant-based, which we steer our portfolios within maximum and minimum allocations,” he says.

“But we are quite broad in where we can go. In 2011, our balanced portfolio had 18% in equities, and by the end of 2013 it was 68%. We are currently over 50% so we are not being bearish yet, but if I was to give a prediction where our next move would be, it would be a reduction.”

All about alternatives
Within equities, the team is increasingly looking towards alternative long/short strategies to take advantage of this market ‘dislocation’. Current favourites include Carmignac Patrimoine European and RWC Europe Absolute Alpha. From a global perspective, there is an allocation to Ardevora Global Equity.

In the US, success has come through an allocation to Legg Mason ClearBridge US Aggressive Growth, a fund with an average holding period of nearly 20 years that is currently overweight energy and healthcare. Elsewhere, Hermes Asia ex Japan has added alpha in a difficult environment for the region, while Schroder Tokyo is a defensive choice in Japan.

“Last year had challenging performances from some of our UK managers – SVM UK Growth and Cavendish Opportunities – but they had stellar years in 2013, Bonnor-Moris adds. “We have been underweight the UK for a long time compared with our competition, which is a characteristic of us being more global in approach.”

In emerging market equities, the models had an allocation to “the big guys”, First State and Aberdeen, in 2013. This has since changed to the likes of JP Morgan Emerging Income and Carmignac Discovery, the latter a more “left-field” choice.