“Domestically, I think Trump’s election is positive for the US equity story but internationally, it starts getting very tricky. When you start saying you can rip up trade deals and call global trade the main enemy, that is reversing a 30-year trend of globalisation and has a potentially damaging impact partcularly on emerging market trading partners around the world.”
For these reasons, Port has very little in Europe and emerging markets, and has a holding in gold, which he believes remains a good diversifier.
Asked how the firm is getting defensive exposure, given how expensive bond markets are at present, Port agrees that in a world where quantitative easing is reaching its limits, bonds provide less of a hedge than they once did. However, he says much of it comes down to aggressively managing interest rate risk.
Ahead of the Brexit vote, the firm’s 10 risk-managed portfolios were heavily exposed to duration but in the months between the referendum and the US election, it sold down much of that exposure.
“We were taking profits on some of the 15-year plus bonds, but we took that off quite aggressively because we wanted to be more defensively positioned.”
Port has also broadened the diversity of Nutmeg’s fixed-income holdings, in part to diversify away from UK-centric holdings. Meanwhile, the firm still maintains exposure to ultra-short-duration and short-duration corporate debt in the UK.
Mortgage-backed securities are a good diversifier at the moment, particularly the pseudo-government offerings from Fannie Mae and Freddie Mac.
In Port’s lower-risk portfolios a significant amount of the allocation is to money market funds, through the Pimco Money Market Fund, for example, which, like the majority of Nutmeg’s holdings, is in ETF form. In the lowest-risk portfolio, it is very much near-term, one- to five-year credit, generally with a duration of about one and a half years.
Crowd funding
In its highest-risk portfolios, on the other hand, there is no bond exposure, but the firm aims to be more defensive in its equity holdings by taking a more contrarian stance.
“We have been quite concerned about the degree of crowding in the popular quality names, and so we have been asking, ‘If there is to be a swing, where will it be to?’”
