Although the majority of the panic-inducing political contests were done and dusted before the third quarter began, with the exception of the German election, president Trump’s twitter threats against North Korea kept investors on their toes and caused gold sales to soar.
The High-Risk Trustee Managed Portfolio Indices weighting toward cash lurched almost a full 1% higher, from 4.49% to 5.23%, but it was alternatives that recorded the sharpest gains, up by more than 2%, from 7.04% to 9.09%.
The average fixed-income exposure fell lower during the period, from 12.06% in the second quarter to 11.66% in Q3, reflecting investors’ reservations about a higher inflationary environment.
On the equity side of things, high-risk managers took the plunge into emerging markets, Asia Pacific – China, in particular – and improving developed markets such as Europe and Japan, emboldened by the synchronised global growth narrative.
Sector rotation
To facilitate this play, Canaccord Genuity Wealth Management’s CIO Michel Perera says the group rotated risk away from more defensive equity markets like the US and the UK, a move which it has kept up into the final quarter.
Perera is especially optimistic on China, not least because its technology companies are giving Silicon Valley a run for its money
and a reason for western investors to cast their eyes to the Far East.
“China is doing very well and the Chinese consumer is doing extremely well. Whether that is diminished by democracy deficit in China is almost irrelevant because we’re talking about world economic growth.
“The Chinese are now importing as much as they are exporting. If you are a western company that can deliver what the Chinese want, you’ve got a fabulous market out there.”
The recovery in Europe and Japan further reinforce the idea that “the world is doing well” and that “you want to be invested in areas that have higher risk”, says Perera. “Europe has recovered to 2% economic growth. It may not look that high but if you’ve come from where Europe has come from, it’s very impressive.”
Importantly, the recovery in the region is “not just Germany. It’s Spain, France and now Italy as well”, he adds. In France, president Macron has implemented a host of changes to the labour laws and pushed economic reform, which means “growth will pick up for structural not just cyclical reasons”.
Meanwhile, opinions on the UK remained as divided as ever in the third quarter.
Perera admits: “The UK is one of the areas of the world we like the least in terms of investment.”
In theory, he says the team at Canaccord Genuity Wealth Management prefers British small caps to their larger FTSE 100 brethren, Brexit overhang means that investing in the region is “a case of individually selecting a company you think will be able to survive different Brexit scenarios”.
Smith & Williamson’s Managed Portfolio Service and multi-manager co-head, James Burns, refrains from taking too strong a view.
“In virtually every portfolio we look at, we tend to have a blend of managers so that we’re not making a big call on value or growth, midcap or small-cap,” he says.
In Smith & Williamson’s highest risk strategy, the Dynamic Growth portfolio, which has more than half of its exposure to Asia Pacific (21.8%) and emerging markets (31.7%) equities, Burns says the group relies on defensive listed UK names like Francis
Brooke’s Troy Income & Growth and Mark Barnett’s Edinburgh Investment Trust to mitigate potential risk and liquidity issues.
“We haven’t factored in Brexit as such, since it will be a long time coming. In the meantime, we are picking managers that have good long-term records who we think will continue to outperform the market.”
The real difference between the two managers lies in their weighting toward fixed income. Over Q3, the Smith & Williamson Dynamic Growth Fund only had a 2.7% weighting in fixed income.
But where Canaccord Genuity has gone for inflation-linked bonds and mortgage loans, Smith & Williamson has put all its money on global high yield in its highest-risk bucket, although this is still below the benchmark’s 5% weighting.
Perera’s preference for mortgage bonds has to do with the recovering US housing market and rejuvenated US consumer.
The fact it is the only segment in the fixed-income market where yields and interest rates are correlated is the icing on the cake.
On his cautious decision to add inflation-linked bonds, he says: “If Janet Yellen doesn’t know where inflation is going, I’m not going to second guess her.”
