In a portfolio, how many funds is too many funds?
Tacit Investment Management has one of the more concentrated portfolios in our database, in terms of fund holdings.
As a minimum, Tacit will take at least a 5 per cent stake in each fund they hold, so as to really build a conviction in each mandate and keep the bar high for new products to enter their portfolios.
This equates to a total of 16 funds and a cash position in their balanced portfolio — 10 of which are equity-based.
“I think the industry seems to be focused on managing volatility and using diversification as a tagline,” said Kypros Charalambous, Tacit’s investment director.
“How many value managers do you need? How many growth managers do you need?”
He added that they do care about diversification and it makes sense when managing stock-specific risk, but that when using funds, “people are quick to forget that they’re already diversified in their own right.”
Some of Tacit’s equity allocations include 5 per cent weightings to Artemis SmartGARP Emerging Markets, a Nasdaq 100 ETF, and the Scottish Mortgage Investment Trust.
Indeed their wider investment philosophy is rooted in the principles of wealth preservation and modest growth for clients, using Benjamin Graham’s idea of a 50:50 equity-bond split.
They see a two asset-class world: those with predefined cash flows that act as ‘stabilisers’, and growth assets — namely equities.
Side note: last year we discussed whether modern portfolio theory still holds water. Decide for yourself by following this link.
In fixed income, Charalambous believes in achieving post-inflation, post-tax returns for clients, which has led them firmly down the path of inflation-linked bonds, specifically US Tips, as well as some direct fixed income holdings, too.
Tips comprise 20 per cent of their balanced portfolio, as well as a 7.5 per cent holding of high-yield bonds. This was in fact cut from a resounding 15 per cent weighting earlier last year.
Their focus on capital preservation keeps them out of anything too complex in the alternatives world.
“From our experience, trying to find the right product at the right time to do the right thing when a tail event happens is very difficult,” he said.
“We’re a manager that focuses on liquid assets, liquid markets, and we’re very much focused on return of capital rather than return on capital.”
“So we’re very cautious that in certain extreme market conditions, liquidity has a big impact on whether a client gets their money back or not.”
A recent chat with alts house AQR made the case for this ‘challenging’ asset class, which you can read more about here.
