Pyrford Global Total Return: January 2024 update

• The fund is run by a very experienced team, the majority have more than 20 years industry experience, having worked at Pyrford for at least 10 of those

• We like their long-term, disciplined investment philosophy, which has been in place for many years

• Long-term performance has been delivered with much lower levels of volatility compared to broader global stock markets

• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Pyrford Global Total Return fund aims to deliver stable returns ahead of inflation over the long term and provide some shelter for investors’ money in times of hardship. While it won't shoot the lights out, the managers try to grow investors' wealth modestly over the long run, without all the significant ups and downs of investing fully in the stock market. Like all investments it will still rise and fall in value, so investors could get back less than they invest.

We believe this fund could be a good option for a more conservative portfolio, or a way to bring some stability to a broader investment portfolio.

Manager

The team behind this fund is made up of a number of highly experienced investors. Tony Cousins leads the team and has worked at Pyrford for more than three decades. Cousins is also Chief Executive Officer (CEO) and Chief Investment Officer (CIO) of Pyrford. This increases his responsibilities, but we are comfortable he spends most of his time on fund management and that he receives vital support from the rest of the team. They help with other research, such as the analysis of individual companies.

Cousins also makes use of the Investment Strategy Committee, who are in charge of broader decisions, such as the portfolio's asset allocation - the amount invested in various assets, such as shares, bonds and cash. Overall, there has been little change within the team, which we view positively. This committee is made up of Cousins, Paul Simons (Head of Portfolio Management, Asia-Pacific), Daniel McDonagh (Head of Portfolio Management, Europe) and Suhail Arain (Head of Portfolio Management, North America). The experience of the committee is significant, with over 110 years in the industry between them.

Pyrford have confirmed that they are making some changes to senior roles within the business over the next 18 months or so. Please note that these changes are subject to regulatory approval at the current time.

Cousins will be stepping down from his CEO and CIO roles, which will be passed onto Simons and McDonagh respectively. Initially the firm plans to move to a co-CEO and co-CIO structure, with Cousins working alongside Simons and McDonagh for a period of time to allow a smooth transition. Cousins will then step down entirely from these roles and focus purely on investment matters going forward.

Simons and McDonagh will also hand over their Head of Portfolio Management roles for the Asian and European regions, to Stefan Bain and Peter Moran respectively. Bain and Moran will become part of the Investment Strategy Committee as part of this change.

We view these changes as part of longer-term succession planning for Cousins and consider them to be both sensible and positive. Once complete, his focus will be on investing and he will remain significantly involved in all investment related decisions. These changes also offer important career progression for four other senior members of the team at Pyrford, which we also view as positive.

Process

The Pyrford Global Total Return Fund launched in 2009 and Cousins and the team have three key aims. Their first is not to lose money over a 12-month period. Their second aim is to deliver an inflation-beating return over the long term, and thirdly, to do this with low volatility – fewer significant ups and downs in value than a fund invested entirely in shares.

In order to achieve this, the team invest flexibly in three main assets - shares, government bonds and cash. They can invest in companies across the globe, with the flexibility to invest in emerging markets, which increases risk if used. The shares are expected to perform well and generate most of the fund's growth over the long term, but can be quite volatile in the short term. The bonds and cash are expected to perform differently and bring some stability to the portfolio.

When the team is more positive in their outlook or when stock markets have fallen a lot and have the potential to rebound, they invest more in shares. They have a structured approach to decisions about how much of the fund to invest in different assets such as shares or bonds, generally linked to high level market values. They monitor a number of different stock markets and when these increase or decrease to pre-determined levels, this triggers the team to formally consider whether to change how much they have invested in each asset class.

2023 saw the team reduce their exposure to shares, following market rises during the end of 2022 and start of 2023. They reduced their overall exposure to shares from 40% to 35% at the end of January. They invested the proceeds into government bonds at the same time.

In October 2023, they also increased the duration position of their bonds, with a target of 5 years, compared to their previous target of 3 years. Duration is measured in years and reflects how sensitive the fund is to interest rate changes. The higher the duration value, the more sensitive the fund is to interest rate changes. The team made this change as the yield on 10-year US Treasuries approached 5%, which they believed to be good value.

This means that, at the moment, the fund has around 35% invested in company shares, 63% invested in government bonds and 2% in cash.

In terms of changes to their shares in 2023, the team sold their position in Saputo Inc. This is a global dairy company that is facing the headwind of non-dairy alternatives, along with some significant acquisitions that have reduced profitability over the short term. Given the uncertain outlook, the team took the decision to exit their position.

They purchased Toromont Industries, which owns a number of brands including all of the Caterpillar franchises in Eastern Canada. They believe the mix of revenues from the underlying businesses gives the company steady income across the economic cycle and the shares were priced at an attractive entry point. The team also purchased Venture, an electronic manufacturing services company based in Singapore and Telekom Malaysia, Malaysia’s fibre optic broadband provider.

Looking to the future, the team remain cautious. They note that inflation could remain sticky, partly because of continuing low unemployment levels. They also believe that the full impact of the significant interest rate increases has not been fully felt by the economy and will continue to act as a headwind in 2024.

Please note as this is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.

Culture

Pyrford International was established in 1987 and previously owned by the Bank of Montreal. Pyrford is now part of Columbia Threadneedle Investments, the global asset management business of Ameriprise Financial Inc, following an acquisition completed on 8 November 2021.

Pyrford continues to operate as a fully independent boutique and retains control over its investment activities, staying true to the philosophy it's developed over many years.

We like that Pyrford is home to a stable and close-knit investment team. There has been little turnover within the team and most members have spent the bulk of their investing careers at the group. This reflects well on the culture they have cultivated over the years. We think the team has done a good job at employing investors that share a similar mindset, which should ensure continuity in the philosophy. We would prefer their variable compensation to be more closely linked to fund performance, but we still think the team is well motivated to deliver returns for clients.

ESG Integration

The team at Pyrford integrates Environmental, Social and Governance (ESG) considerations through a combination of internal analysis and specialist external independent research. They have one investment process across all portfolios, which focuses on quality, value and the long-term sustainability of earnings and dividends. They think sustainable earnings can only be achieved through responsible environmental and social practices and that shareholders only fully benefit from these at well-managed companies. Fund managers therefore assign an ESG rating to every stock they cover, derived by examining 15 factors from greenhouse gas emissions to health & safety and executive compensation. This rating forms part of their internal stock summary analysis, which is the output of their bottom-up stock selection process.

The team also use MSCI ESG reports. If a company’s MSCI rating falls, an alert is sent to the relevant portfolio manager or analyst and the reasons for the downgrade are discussed in detail by the Pyrford investment team. When it comes to voting, Pyrford considers every resolution individually and casts a proxy vote on each issue with the best interests of clients in mind. There is a dedicated proxy voting portal on the firm’s website, where details of how they voted on every resolution can be found.

The fund does not apply strict exclusions though and the team are happy to invest in some companies that others would consider uninvestable on ESG grounds. Examples include tobacco and oil companies. Overall, the expected return profile of an investment is considered more important, however we believe that the framework the team has in place allows them to adequately identify material ESG risks, which helps them pick companies to invest in.

Cost

This fund has an ongoing annual charge of 0.84%, but we've secured HL clients an ongoing saving of 0.26%. This means you pay a net ongoing charge of 0.58%. Part of this discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s official benchmark is the Retail Price Index (RPI). RPI is a measure of inflation. Since launch, the fund has underperformed this benchmark, returning 72.17%* compared with 77.45% for RPI. For a long time the fund was ahead of this benchmark, however the fund has significantly lagged the high levels of inflation over the last couple of years.

The growth delivered by the fund since launch has been achieved with much lower levels of volatility compared to the broader global stock market, limiting losses in times of hardship. Over this period, the managers have lost money in just one calendar year - 2018. This is an impressive achievement, though it's a reminder that even conservative funds can lose money. Past performance isn’t a guide to the future.

Over the 12 months to the end of November, the fund produced a positive return of 1.23%. While this is lower than RPI over the period, this is a good outcome given the market environment of interest rate increases and high inflation. UK government bonds and cash have added most to returns over the 12 months, while overseas government bonds have lost most value for the fund. Within the shares part of the fund overseas shares added some value, while UK shares lost value, meaning overall that this part of the fund effectively held its value over the period.

While the fund’s conservative positioning will limit returns if markets rise, it should cushion against market falls, and we expect the team to remain prepared to capitalise on any opportunities to add risk at more attractive valuation levels.