This meant that over the full year, low-risk portfolios generated a return of 4.8%, which, while lower than the returns generated in the previous three years, was marginally better than both their medium and high-risk counterparts.
Despite the strong performance in the fourth quarter, however, there was little change at an aggregate level in terms of overall asset allocations.
At the end of the quarter, 35.4% of low-risk portfolios were in fixed income, 39.8% in equities, 8% in cash, 10% in alternatives and 6% in the ‘other’ category.
Changing allocations
Some of the outperformance will undoubtedly have been the result of the continued strong performance of bonds and, in particular, developed market government bond markets.
But this is also where much of the change in the underlying holdings seems to have come. According to Richard Stammers, investment strategist at European Wealth, there was a lot of change seen during the course of 2014 in the firm’s fixed income allocation.
“We came into 2014 holding a mix of high yield, strategic and total return bond funds. We particularly liked the managers at SWIP and 24,” he says. But, he adds: “As the year progressed, we felt high yield was getting expensive. For the return we were getting, the amount of risk we were taking was like running into the motorway to pick up coins.”
Because of this, Stammers says the group moved the money into strategic bond funds. However, going into the final quarter of the year, while the group remained impressed with the depth of knowledge and level of skill demonstrated by its chosen strategic bond managers, Stammers says, the risk/return profile had shifted.
For low-risk clients, the prudent approach was to shift its strategic bond exposure, as well as the remaining high risk and absolute return fund exposure, into cash-plus funds, the firm decided.
Return of capital
The fund of choice happens to be an in-house fund, the European Wealth Sterling Bond Fund, managed by Nigel Marsh, but Stammers is quick to point out that this, in itself, was not a requirement.
“His emphasis is on return of capital rather than return on capital, and that is an approach that rings true to us right now for low-risk clients,” he says.
However, while bond allocations have been brought right down, the group is cognisant of the fact that low-risk clients are still very yield hungry. As a result, the group has kept quite a lot of its exposure to the commercial property sector.
However, here too, Stammers is cautious: “A lot of hot money is chasing commercial property, which has raised a few liquidity issues for us. As a result, commercial property is moving into the amber zone, from a risk point of view. It is not a sell but it is a concern.”
Sailing into a headwind
Hector Kilpatrick, CIO at Cornelian Asset Management, says his firm has also made significant changes to the underlying make-up of the portfolio.
During the period, he says, the firm took roughly 300 bps out of UK equities, while upping its exposure to commercial property and absolute return funds by 100 bps and 200 bps, respectively.
In the bond space, he says: “A headwind for us recently has been our light exposure to gilts as well as how short our duration has been.” The group currently has 25% of its bond allocation in investment grade strategic bond funds and 6% in government bonds.
The group has 6% in commercial property but, Kilpatrick says, the firm is beginning to become a bit wary of the more vanilla commercial property funds.
In the equities space, the group has sold out of holdings such as Rexam, which it felt had too large an exposure to emerging markets – an area that remains a concern, especially given the recent currency stresses.
At a broader level, the group still has 25.5% in UK equities and 23% in international equities. And while the group remains positive on equities, it has taken some steps to de-risk the portfolio. “We have a generally positive outlook on equities,” Kilpatrick says,“but you have to take cognisance of the bond market.
“Bond yields are telling you there is a problem, that the West might not reach escape velocity. The oil price falls in recent months have been hugely positive but the level of risk has risen.”