Global Value and Income Dispatch

An insight into the JOHCM Global Income Builder Fund - A fund for all seasons 

  • Giorgio Caputo
  • Robert Hordon
  • Adam Gittes
13 Oct 2018
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A fund for all seasons (and other reasons)

What is the role of the JOHCM Global Income Builder Fund within an individual’s overall  investment portfolio?

We believe the fund can be a useful tool for long-term saving  across a range of investment scenarios. It aims to preserve  and grow capital while also generating a stable income stream  over long time horizons and different market environments.  Flexibility is central to our benchmark-agnostic approach.  Our team can move across sectors, asset classes and global  financial markets in search of the best individual investment  opportunities available. This flexibility is protected by our  commitment to capacity discipline and intention to restrict asset  growth within the strategy above $10 billion. Beyond this level,  we believe allocation fund managers like us may lose their  ability to make material investments in smaller equity and credit  opportunities. And they may generally compromise their ability  to make portfolio adjustments in a timely and efficient way,  either to seize opportunities or, more importantly, to protect  capital.

Exploiting Mr. Market and his moods from the bottom up

We are value investors. That means we are sensitive to  price. Ben Graham, the founder of value investing, famously  described “Mr. Market” as a fickle individual, prone to rather wild  mood swings. What he is willing to pay for a security varies from  one day to the next. These mood swings sometimes – but often  don’t – properly reflect genuine shifts in the intrinsic value  of the underlying business.

Our job as managers is to locate when and where margin of  safety – the gap between Mr. Market’s current view and our  assessment of the long-term value of a business – expands and  contracts and invest accordingly. Unlike top-down managers  who make broad calls on the economy or an asset class, we  perform this function security by security. And we use our  freedom to move across global financial markets in this never-  ending pursuit.

How to use this fund – part 1
As a core multi-asset fund

We designed the fund to function much like an endowment for  individual investors. We also sought to create a vehicle that  would be sufficiently diversified and balanced across asset  classes and risk factors, so that a prudent investor could, at  least in principle, have all their long-term savings in the fund if  necessary. Indeed, as managers, we hold a significant chunk of  our personal savings in the fund.

Endowments, whether for a university or a charitable foundation,  are pools of capital established to provide financial support to  institutions indefinitely. In the U.S., the IRS requires private  foundations to pay out five percent of the value of their funds  annually to maintain tax-free status. The challenge facing an endowment manager is how to deliver this five percent every  year without shortening the lifespan of the capital base. This  problem is made worse by inflation, which eats away at the  value of the fund in real terms over time.

Many individual investors, especially those whose investment  focus has moved from growing their capital towards  needing regular income, e.g. those retired or nearing  retirement, find themselves in a similar predicament. To meet  the potential income needs of our investors, we seek to maintain  a diversified portfolio of equity and fixed income securities  that will, over time, generate a meaningful level of distributable  income without sacrificing real long-term portfolio growth. In  particular, we believe our specific capabilities in international  equities (where dividend yields are generally higher than in the  U.S.) and high yield credit are especially helpful for achieving  our income objectives.
What does a level of distributable income that is compatible with  real long-term portfolio growth look like in practice? Given  our current estimates of potential expected returns across  asset classes, we view this sustainable level as three to four  percent net of fees. This figure may change over time as market  conditions evolve.

Dry powder

Like most endowment managers, we appreciate the long-  term benefit of being invested in risk assets, albeit in a highly  selective way. We never try and time the market; we see that  as speculation that can have painful consequences. But we do maintain a portion of our portfolio (typically five to fifteen  percent) as our reserve buying power. This usually consists of  cash, government bonds and gold-related investments. These  reserve funds serve as a source of liquidity to take advantage  of market environments in which margin of safety opportunities  become more abundant and compelling. These will often  be periods of increased risk aversion and negative market  sentiment.
With a portion of total return anchored by investments that  generate predictable cash returns, consistent exposure to what  we view as the best value opportunities in durable businesses  in equity and fixed income markets, and the ability to invest  in riskier assets when prices become especially favorable, we  argue the fund can be viewed as an active core holding for the  long term. Individuals and their advisors can then use other  instruments (such as specialized funds or ETFs) as satellite  investments to adjust for risk and income preferences, or to  gain exposure to specific market opportunities.

How to use this fund – part 2
A conservative alternative to global equity funds

The fund can also be seen as a lower volatility alternative to  global equity funds. We expect the equity exposure to range  from 40-65%. The level of equity exposure will generally be  a function of the availability of margin of safety opportunities.  We will typically raise equity exposure in environments when  risk appetite is waning and decrease it in environments where  investors are more complacent or even exuberant. We believe  this preference for putting capital to work in ‘risk off’ scenarios,  while paring back our exposure in ‘risk on’ scenarios, may  contribute over time to better downside capture performance  and risk-adjusted returns relative to strategies that are fully  invested in equities at all times.

The fund’s exposure to high yield corporate credit also lends itself to the  ‘conservative equity’ use case. Though different from equities  in their contractual nature, seniority in the capital structure and  limited upside potential, high yield bonds are like equities in  many respects. Similar to equities, high yield instruments are  fundamentally claims upon the cash generating power of the  businesses to which they belong. Historically, high yield bonds  have exhibited lower volatility than the stock market, while  generating total returns substantially higher than fixed income  alternatives. While not properly speaking equity, we believe the  high yield component of our fund may offer a return profile that  could be attractive to more cautious equity-oriented investors.

A differentiated approach for income portfolios

We think our emphasis on investing with a margin of safety  coupled with global perspective distinguishes us from other  income-oriented funds.
In many cases, income funds have a tendency to skew towards
U.S. dividend stocks which tend to be narrowly clustered in  a few sectors – see the August 2018 ‘Global Value and Income  Dispatch: ‘Looking for income? Three reasons to go global’  for a more detailed look at this topic. And some income funds  rely heavily on investment vehicles carrying substantial debt  (such as mortgage REITs or infrastructure funds) or present  significant duration (interest rate) risk, perhaps because of high  exposure to “bond proxy” equities or a high allocation to long-  dated investment grade debt.

By emphasizing international opportunities,  balance sheet strength and free cash generation, while avoiding  investments which we think involve excessive and under-  compensated interest rate risk, the fund can potentially improve  and diversify income-oriented portfolios. Furthermore, our  opportunistic investments in more eclectic securities, including  small/mid-cap global equities and smaller credit issues, are  likely to be complementary to the holdings of other income  funds.



Investors should note that investments in foreign securities involve additional risks due to currency fluctuations, economic  and political conditions, and differences in financial reporting standards. Smaller company stocks are more volatile and  less liquid than larger, more established company securities. The small and mid-cap companies the Fund may invest in  may be more vulnerable to adverse business or economic events than larger companies and may be more volatile; the  price movements of the Fund’s shares may reflect that volatility. Fixed income securities will increase or decrease in value  based on changes in interest rates. If rates increase, the value of the Fund’s fixed income securities generally declines.  Other risks may include and not limited to hedging strategies, derivatives and commodities.

The views expressed are those of the portfolio manager as of September 2018, are subject to change, and may differ  from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of  future events, a guarantee of future results, or investment advice.

Sources for all data: JOHCM/Bloomberg (unless otherwise stated).

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