Back in August last year, the markets were at their peak. An economic soothsayer might have seen this was a great time to start positioning more defensively and, although Emery Little is no psychic, that is exactly what it did.
Emery Little is a family firm, and its investment committee is no different. ‘It is headed up by my dad [Andy Little], because that’s his bag,’ says chief executive Jo Little (pictured). ‘He loves investments.’
Little became chief executive of the Hemel Hempstead-based firm last January. The family duo sit on the investment committee with chartered financial planner Alfie Mullan; consultant Richard Allen from investment support firm RichardAllenInvest; and representatives from Asset Intelligence Research, Robert Love and Kel Nwanuforo.
‘Asset Intelligence helps us with the construction of our model portfolios,’ Little says. ‘The committee meets quarterly, but Asset Intelligence reviews the portfolios on a daily basis.’
Emery Little has five growth and three income in-house model portfolios at its core set. These have been running since the retail distribution review came into force in 2013. ‘Before then, it was more like fund selection per client,’ Little says.
Word of warning
Following the financial crisis, markets rallied from their low point in early 2009, and investors have enjoyed a bull market ever since.
Having only been running model portfolios primarily during a bull run, how does the firm ensure the portfolios are properly stress-tested? ‘We are really conscious when giving clients performance data, especially at the outset, to backtest it through the credit crunch,’ says Little.
‘Because otherwise as soon as that bit gets off the chart, it looks really great and we have to constantly remind people about it. It wasn’t that long ago and it’s going to happen again at some point, maybe even this year.’
In August 2018, the committee undertook fund changes to become slightly more defensive, as part of its quarterly review. It took the view that while there was uncertainty surrounding the outcome of Brexit negotiations, more market volatility looked likely regardless.
‘On the one hand, investments are out of your control,’ Little says. ‘But on the other you are custodians of your clients’ money, and you want to do the best you can to protect it. Especially with our client bank, which is more concerned with the protection of wealth rather than the aggressive accumulation of it.’
Emery Little decided to make changes to the Aberdeen funds it was holding in its core portfolios. ‘The decision was made to remove the Aberdeen Japan Equity fund following a period of sustained underperformance coupled with significant outflows experienced the previous year,’ Little says.
Aberdeen’s Japan fund manager Chern-Yeh Kwok is ranked 110 out of 120 in Citywire’s Equity - Japan sector over the past year to 31 January. He returned -14.9% in the same period, compared with a manager average of -9.2% and positive 3.7% from the top-performing Lindsell Train Japanese Equity fund.
The merger of Standard Life and Aberdeen Asset Management in 2017 also spurred the decision to switch out of the Aberdeen Emerging Markets and Aberdeen Asia Pacific Equity funds. ‘Our investment committee was concerned the former Aberdeen research process would be disrupted and the funds would not perform as expected,’ Little says.
With recent market volatility, the funds that performed well in 2018 were the ones that protected on the downside versus the relevant index or benchmark, in this case the FTSE All Share and IA UK All Companies.
According to the firm, these were: LF Lindsell Train UK Equity, managed by AA-rated star manager Nick Train; the Jupiter UK Special Situations, managed by Citywire + rated Ben Whitmore; and Liontrust Special Situations, managed by AA-rated duo Anthony Cross and Julian Fosh.
Little says Train’s fund had ‘performed exceptionally well in recent years’ returning 66.7% over the past half-decade. ‘We were keen to retain these gains for investors, while reducing some of the concentration and investment style risk inherent in the fund’s approach,’ explains Little.
The Jupiter UK Special Situations fund (see graph below) was ranked 36 out of 159 in the UK (All Companies) sector over three years, returning 28.9%, compared with the average manager’s 22% over that time period. Whitmore, a stalwart manager in the value space, has been consistently rated since 2012.
The fund has a top holding, at 6.8%, in BP. As it happens, Emery Little’s clients have historically been employees of the energy giant, so the firm enjoys a few insider insights into the way the company operates.
The August 2018 changes were focused on the performance and outlook of particular funds. They were more limited than a much broader rebalancing exercise at the start of 2017.
In its growth portfolios, Emery Little introduced exposure to short-dated bonds, believing the position would help protect client assets in the event of rate rises.
It also introduced exposure to inflation-linked corporate bonds, to help protect the real value of holdings. Allocations to global fixed interest slightly increased, generally at the expense of UK bonds, due to uncertainty about the UK economy.
The firm slightly reduced its UK equity allocation. In the UK smaller companies sector, it replaced Investec with Old Mutual. ‘Our confidence in the capability of the Investec fund to outperform a broad UK smaller companies benchmark has reduced over the past year, following changes in management,’ says Little.
It also slightly reduced allocations to the Lindsell Train UK Equity fund.
The same fixed interest changes were made to Emery Little’s income portfolios but, on the growth side, the Fidelity Enhanced Income fund was introduced. This fund, managed by Michael Clark and David Jehan, ranked 35 out of 110 managers in the Citywire Equity - UK Equity Income sector over one year, with the managers returning -3.3% compared with the average manager’s -4.9%.
‘It is similar to the Schroder Income Maximiser fund,’ the firm says. ‘In that it operates a “covered call” strategy to help boost income payments. But the Fidelity fund has a distinctly different investment style and so will diversify investment style risk.’
Aside from its core portfolios, Emery Little also uses Vanguard LifeStrategy funds for things such as junior ISAs or smaller pension pots. This brings the total split across portfolios to 90% active and 10% passives.
Less than 1% of clients have requested to use a discretionary fund manager instead of Emery Little’s portfolios. ‘But hopefully now our core portfolios have been running a good few years those clients might eventually transfer over,’ Little says.