Valuations are sky high in the big quality names and most active managers are talking about it. As a result, the firm moved into a broad US value smart beta ETF between December and February.
“If you don’t have perfect hedges, you can look for something that is already distressed because there is less risk of it becoming more distressed. If you are in something that is on extreme valuations, and everyone is in that segment, the potential downside is much greater.”
This focus on the potential downside underpins the firm’s view of risk and the design of the 10 funds Port and his team manages. “They are designed in a very gradated way and made up of holdings in off-the-shelf ETFs,” he says.
“We distil the universe down to about 200 ETFs, which doesn’t sound a lot but it allows us to play any factor you can think of.”
The instruments are selected, not only on cost of the products concerned but also on how well each instrument tracks its index and, importantly, whether or not it is the right index to track. Equally important is how liquid the funds are. “You can have a super cheap ETF but if it is impossible to trade, it is not going to work,” says Port.
On the currency side, in the lower-risk portfolios exposures tend to be fully hedged, but within the high-risk portfolios that can be adapted over time.
“At the moment we have more dollars and yen than we would normally in portfolios. We have had that for some time and it has worked very well.
“We were closing that out before the prime minister started talking about hard Brexit. On hearing that, we increased the position again, happily on the right side of the fat finger fall in sterling.
“We generally don’t take really big positions in FX as it is quite hard for most customers to understand.”
Regime analysis
For a similar reason, according to Port, there is a clear step between each of the 10 bands in terms of how much risk you are taking as an investor. “It is very linear,” he says.
To measure this, the firm uses conditional value at risk as an indication of what the most extreme down month might be but also does a lot of regime analysis to understand how different risks will affect the funds over longer periods.
