Joe Bunting
“Our objective is to deliver the long term returns available from equities, but with a lot less of the volatility,” states Joe Bunting (pictured), chief executive of boutique asset manager Tellsons who also runs its flagship product, the EF Tellsons Endeavour Fund.
With this objective in mind, this fund’s portfolio construction has some necessary defensive features. Its top holdings are long dated US Treasuries, the global benchmark of risk-free return which make up 7.4 percent of the fund.
Mr Bunting uses the analogy of a sail boat to describe the fund’s structure although clearly an avid sailor, adapts key phrases in popular parlance to better reflect his strategy.
Whereas corporate bonds and bond proxies are in the hull of the ‘ship’ they don’t act as ballast, as this outdated (in sailing terms) method slows the vessel down. Instead, Mr Bunting says these assets act as a keel which instead of slowing the ship helps move it forward.
The rise in popularity of bond proxies was a result of bond yields being dampened by huge amounts of quantitative easing being used across the globe.
The idea that these assets can also help move (provide growth) for the fund was perhaps shown with last week’s AstraZeneca results, the pharma giant is the fund’s third’s largest holding. The management of the company signalled double-digit earnings growth as well as a hike in the dividend for the first time in a decade.
What really puts the wind into the sails though, or as Mr Bunting qualifies the spinnaker, are the firm’s cyclical holdings. The dominance of growth stocks away from cyclical or value names is shown in this fund as the benefit of its cyclical holdings have only been noticed in the last 18 months.
“We’re very driven by the business cycle,” says Mr Bunting and given where we are in that cycle, with higher inflation followed by a hike in interest rates, is well captured by some of the names in the fund’s portfolio.
For instance, commodities companies such as Royal Dutch Shell, Rio Tinto, Anglo American and Marathon Oil are great plays in an inflationary environment. The fund also holds some major banking groups that will benefit from a rise in interest rates such as BNP Paribas, Lloyds and Rabobank.
The different parts of the portfolio are described as sleeves and while cyclical names are a relatively recent driver of growth for the fund, this style of equity has carried a 20 percent weighting in the portfolio since inception.
The growth sleeve was contributing 15 percent annualised returns 18 months ago, 7 percent from defensive equities and 5 percent from corporate bonds which Mr Bunting says is exactly the long-term average for this asset class.
Petra
A beautiful place in Jordan, where Raiders of the Lost Ark was filmed in part, Petra has a place in many people’s minds and hearts. It’s also what the central investment methodology devised by Tellsons is called.
Put simply, PETRA is (price divided by earnings) divided by total return adjusted for risk. Given this is fairly balanced fund between equities and bonds, PETRA can be used for both asset classes. For instance, the price of a security is obviously applicable to both but earnings can refer to consensus earnings estimates put out for equities but also applicable to the coupon a bond pays.
The total return derives from all earnings growth, dividend, buyback, interest, capital gain/loss and amortisation from the securities (a reason why AstraZeneca’s dividend hike was welcomed by the firm). Finally, the adjustment (or A in PETRA) can be for discounts or premiums attributed to the securities for instance the discounted earnings given to growth stocks at the moment due to inflation.
The total return can be influenced by many factors, for instance Mr Bunting says that in a mature market like the UK, 30-40 percent of this comes from dividends which when considering that FTSE 100 is ‘old economy’ and contains many companies with high dividend yields like miners and banks sounds spot on. Apart from 2020 when distributions were in short supply.
Given the complex composition of this fund, aspects such as turnover rate are going to be high, between 100 and 200 percent according to Mr Bunting. However, of this, 80 percent is coming from cyclical names which can go in and out of favour pretty quickly
Last year, the fund turned over half of its bond holdings (the firm likes to hold physical paper as opposed to using derivatives for its fixed income exposure) and expects to do the same this year.
A look at the portfolio shows that there’s little appetite for small cap stocks, with UK-listed wealth manager Close Brothers mentioned as having a market cap that would be a minimum (the company’s hardly a minnow, with a market cap in excess of £1 billion).
The fund also prefers to stay in developed markets and has ‘very little’ in emerging markets.
It is the performance of Endeavour which really sets it apart from similar types of funds. With a three and five-year annualised return of 7.68 percent and 5.34 percent respectively, it has outstripped its benchmark by some way, with the index returning just 1.86 percent and 0.39 percent over the same time periods.
