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Neil Shillito - "Why I'm selling one of the best performing funds of 2017"

Fund Manager
12 February 2018

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Neil Shillito – Why I’m selling one of the best performing funds of 2017

 

If fund managers claim to only buy ‘good’ stocks or funds, then why do they sell them? There are of course endless reasons for selling - some ‘good’ stocks turn ‘bad’ and they are removed from the portfolio. However, holdings can be sold despite their good performance, and this can be due to reaching a price target; re-alignment of the portfolio; or a better, cheaper alternative. But there are other reasons for disposing of seemingly good holdings, the rationale for which might not be immediately obvious to investors.

 

One of the identifying features of the Downing Diversified Global Managers Fund is that the managers actively seek ‘boutique’ funds who are generally unknown to the market. In many instances these are new launches with no apparent track record. One such fund is Fundsmith Equity, managed by Terry Smith. This is now one of the UK’s best known and most successful funds with assets under management of approximately £14bn.

 

We invested in Fundsmith Equity when it was virtually unknown, buying into Terry Smith’s process and investment style, rather than his ratings.  The Fund has been a notable contributor to our own performance over the period, however, we have recently sold our position, and it is understandable that some of our investors may query this decision.

 

Fundsmith is a large-cap global equity fund that is correlated with some of our other holdings – we therefore kept our holding relatively low, at about 3% of the portfolio. Latterly we have become increasingly concerned that investment sentiment is changing, bond yields are rising and interest rates in the US will almost certainly go up. These factors may potentially lead to a correction in the equity markets. If this happens, investors will be spooked and it is likely that the biggest and most liquid funds will be hit hardest, including Fundsmith. Given our modest holding we took the decision to sell out of Fundsmith and deploy the capital to Kriticos (global equity short-only) and Time Commercial Freehold (commercial property), both of which are held our ‘alternatives’ allocation which are non (or lowly) correlated to equity. We believe these funds can contribute to the portfolio in a positive manner when equity markets perform well, but equally can protect on the downside at times of market stress.

 

A good fund manager should always have a keen eye on protecting investor’s capital. The Downing Diversified Global Managers Fund seeks to achieve global equity-like returns but with lower risk, and the motivation for some of the investment decisions we take might not always seem obvious.

 

Neil Shillito

Lead Manager, Downing Diversified Global Manager Fund

February 2018

 

This article is for information purposes, should not be regarded as investment or taxation advice and no reliance should be placed upon it. Capital is at risk. The value of investments and any income derived from may go down as well as up and investors may not get back the full amount invested. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Past performance is not a reliable indicator of future results. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Registration No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London, EC3R 6HD.

 

 Source: FE Trustnet Source 31/01/17

Source: Downing

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