Jeremy Balfour-Melville, co-founder and investment manager at Malloch Melville Investment Managers discusses avoiding the mega funds: ‘Small is very often beautiful’
'Malloch Melville Investment Managers has managed its risk adjusted, multi-asset model portfolio service (MPS) for financial advisers since mid-2016. We have developed an investment philosophy as the antidote to the mass market propositions our larger rivals are being forced into due to their huge and ever increasing scale, and the industry requirement to treat clients consistently.
We actively avoid the mega funds that are nothing more than expensive closet index trackers. Instead we prefer to allocate client monies to more niche fund management houses. We like these managers’ processes and controls, and these funds typically produce excellent medium-term performance. In our world, small is very often beautiful.
We offer growth and income strategies between risk profiles 3-8 on Dynamic Planner. We target volatility bands and annually update our strategic asset allocation at year end for each risk profile, once we have new annual volatility and correlation data available.
We seek to dampen volatility through the market cycle by reducing exposure to asset classes that are outperforming. We have reached levels we are less comfortable with and recycled into asset classes that we feel have underperformed and look better value.
We can introduce tactical allocation changes at any point during the year and the most recent example of this was to tweak our international equity exposures in mid-2017 so that we had more meaningful allocations to all regions, except the US.
Our underweight US exposure has worked out well so far, but more important than tweaking the weightings to each geographic region is our selection of the underlying fund managers in each territory. In our opinion, it is the single most important factor in generating outperformance.
While our strategic asset allocation process remains constant, we have seen a number of changes at portfolio level since inception. In our growth portfolio, we have been migrating our UK equity exposure to special situation funds with a ‘go anywhere’ mandate, but are generally happiest hunting in the small and mid-cap areas of the market, where there tends to be better value and growth opportunities.
Most recently we added Chelverton UK Equity Growth fund to our growth portfolio and Chelverton UK Equity Income fund to the income MPS. We like Chelverton’s approach as an investment house.
In order to ensure each risk profile is suitably diversified across the various asset classes, we allocate a fixed 5% to both property and alternatives. Both silos are currently populated with investment trusts as we do not like the open-ended structure in property; there is a poor choice of open-ended alternative funds.
Though we are definitely in the active fund camp versus passive, we do recognise that there is a place for passives within our MPS in areas such as defensive fixed interest, where active managers cannot really add much value. It is important that we keep a balance between including star active managers and keeping the ongoing charges figure (OCF) at competitive levels through the selective use of ETFs.'