Authorised and regulated by the UK’s FCA to provide investment accounts, we are bound by CASS rules to segregate and protect client assets.
- As we are absolute return investors, our focus is on taking risk when and where we feel it is in the best interest of our clients
- We remain disciplined and are happy to stand on the side-lines
- It feels strange to think that the equity market, at least in the US, is either at or near all time highs whilst the macro environment remains so negative
Having entered the second half of an eventful 2020, you could be forgiven for assuming that all of the drama is behind us. It may apply to virus drama, although new daily confirmed cases remain close to the peak. The real drama in H2 however, is likely to be political in nature.
With the upcoming US presidential election, deteriorating US/China relations and the never-ending Brexit negotiations, we appear to be set for some moments of tension in the coming months. It feels strange to think that the equity market, at least in the US, is either at or near all time highs while the macro environment remains very negative.
While we appear to have passed the trough from an economic perspective, we are expecting a long tail from both an unemployment and consumer spending perspective as the short term initiatives in both the US and the UK unwind.
Our risk allocation has remained the same essentially as we were at the end of June – we continue to be about 50 per cent risk on. In the current environment, with 8 out of our 9 multi- asset models positive on a year to date basis, we don’t want to try and chase markets higher. We continue to look for themes and opportunities where there remains some value and upside.
In our investment update webinar, we discussed that with 20% of bonds offering a negative yield, we are seeing almost a ‘buy yield at any cost’ mentality. In a world where the credit risk is arguably greater than pre-Covid-19 levels, returns are substantially lower. The only way we can be comfortable is if we are able to choose the sector, issuer, maturity and placement in the capital structures.
A similar rationale is in place for equities as we would like to continue to choose the sectors, business models and companies that we have exposure to.
At a portfolio level, this has resulted in us holding a larger allocation to single stocks than core global equity ETFs (currently circa 33% core and 67% satellite) On the fixed income side, we similarly have resulted in having a larger allocation to individual names and a smaller allocation to bond ETFs.
What does all this mean from a risk management perspective? As we are absolute return investors, our focus is on taking risk when and where we feel it is in the best interest of our clients. We have no requirement to always maintain levels of equity exposure – and in March, we had very low single digit equity allocations in our growth portfolios. This ability to only hold what we want to hold trains the mind. Each day is a new day with new risks and new opportunities. With volatility comes opportunity, but in these in-between phases, it is possible to talk yourself into more investment activity.
We remain disciplined and are happy to stand on the side-lines. Having just gone through Q2 earnings season, our strategy is playing out well. Our equity exposure has outperformed the S&P 500 by 18 per cent on a year to date basis, and we hold a number of the strongest performers.
We continue to anticipate higher bouts of volatility which will provide more entry points into new holdings and strategies over the coming months. While we shifted a lot of the exposure into Covid-19 related strategies, many of these were themes that pre-existed within our portfolios.
Over the summer months, we remain at risk of some volatility spikes given the underlying economic environment. We remain reluctant to increase exposure at current market levels but would look to use a market pull back as an opportunity to increase exposure to specific names and strategies.