Risk filter
Hambi says the team has been increasing the overall risk profile of the portfolios, which are currently marginally overweight growth assets. This includes an increased exposure to US and Japanese equities.
Regarding the former, two funds were added to the portfolios in December. Brown Advisory US Small Cap Blend has a 50/50 allocation to two strategies: Christopher Berrier’s small-cap growth approach and David Schuster’s small-cap fundamental value philosophy. The second fund is Wellington US Research Equity, which combines 28 separate analyst portfolios, each one industry specific.
“There are strict limits to ensure industry weights are closely aligned to those of the S&P 500, resulting in a fund with returns driven by good stock selection,” says Hambi.
“The style of these ‘sub-portfolios’ will vary but, thanks to careful monitoring, factor bets are minimised to give a blend that has historically had only a slight bias towards quality and growth.”
Other holdings in the US include Cormac Weldon’s Artemis US Select Fund, which again does not have a style bias, and the Old Mutual North American Fund.
“Despite rising nominal interest rates, we expect valuations to remain supported while the Fed remains behind the curve, leading to anchored real rates,” says Hambi.
“The potential for a stronger US economy has filtered its way through to other economies, primarily through the exchange rate.”
In Japan, the preference is for value managers, Morant Wright Nippon Yield and Schroder Tokyo.
“We have added a small overweight to Japanese equities to reflect the positive impact on earnings from a weakening trade-weighted yen,” Hambi explains.
“Improving fundamentals could also help to drive the Japanese Index higher. More available cash to spend on dividends or share buybacks and more attractive equity returns compared with Japanese bonds means there is ample room for improvement relative to its other developed economy counterparts.”
Euro caution
The team has also added a small underweight position to European equities to reflect growing political fragility and the risk of a weakening euro, which will negatively affect sterling investor returns.
The Stephanie Butcher-led Invesco Perpetual European Income Fund was added to portfolios at the beginning of 2016, and it has delivered a yield of over 4%.
The most illiquid investment used by SLI is bricks and mortar property. While this makes for a strong diversifier, the position has been cut down in order to introduce global Reits as a new asset class. This, says Hambi, reflects a positive growth environment in the US, offering something that is more defensive than US equity holdings but with higher yield.
“Despite the sell-off since July 2016, we believe valuations have been overly impacted by rising rates and, as such, room for further moves to downside remains restrained.
“Within the UK, we slightly reduced our underweight to direct property to reflect the potential effects of Brexit on GDP and business sentiment, given the increasingly uncertain European political landscape.”
