Authorised and regulated by the UK’s FCA to provide investment accounts, we are bound by CASS rules to segregate and protect client assets.
Our pre-emptive market pull-back came to fruition in May, the first negative month in 2019 in terms of market performance. Having withdrawn from equities in three separate tranches in the run up to the end of April, we then re-established our exposure at the end of May – just in time to ride the bounce higher. Whilst this might seem almost too good to be true, this is the benefit of utilising multiple methodologies when constructing our portfolios. Whether we are looking at the market through a longer-term macro perspective that filters into our geographical and strategic asset allocations or using a combination of technical and sentimental indicators to allow us to tactically position the portfolios for short term moves, our primary focus is on risk management – trying to position client portfolios to avoid drawdowns and minimise downside volatility.
“Our primary focus is on risk management.”
Simultaneously employing short-term tactical positioning, medium-term geographical allocations and longer-term thematic ideas is designed to enable our portfolios to perform in a number of different market environments.
In fixed income, May saw us reduce our duration to 0 (where applicable) for our client portfolios. Having seen a 35bp shift lower across much of the curve, with the 2s10s spread (difference between the 2yr and 10yr yield) having stabilised at current levels, we preferred holding credit risk rather than duration risk in our models. In May, we saw the 10-year US yield drop from 2.5 per cent down to 2.12 per cent, partly driven by growing expectations of two (if not more) interest rate cuts by the end of 2019. We feel that this is overdone, and we anticipate this reversing in the second half of 2019.
Adrian van den Bok, one of our fixed income specialists, writes more about this. One of his other focuses has been the widening spread we saw in May that accompanied the market sell off. This was largely hidden by declining yields, but we anticipate this reversing and tightening back up again – which is why we pulled the duration down but kept the credit exposure.
On the equities side, Mikhail Trebunskikh, one of our equity portfolio managers, had an active month pulling all our model portfolios entirely out of equities, before then re-distributing up to their neutral allocations just before the end of the month. In the equity section, he looks at some of the sentimental indications, as well as company valuations.
“Our three global multi-asset models comfortably outperformed their benchmarks.”
From a model performance perspective, our three global multi-asset models comfortably outperformed their benchmarks across the board in May. This was primarily attributable to our large positioning involving being underweight on equities that persisted for much of the month. Our longer duration positioning benefitted versus the benchmark, as we saw yields tighten over the course of the month, and we have taken profits on these positions and sold out of longer dated bonds.
Looking forward, we believe that the summer has the potential for volatility; Trump continues to up the ante, the UK and the EU remain at an impasse, and China is considering its next steps. Positioning portfolios to account for events focused around political outcomes is a fool’s game, as it is generally a binary scenario, with nothing disclosed prior to the announcement. We prefer to look at markets from an upside/downside risk perspective, with an aim to minimise downside volatility and to participate in upwards volatility