However, when considering the macro view and geopolitics, he adds: “This is a market where you are paid to take a view. With the range of outcomes so high, therein lies the opportunity.”
For true bears, cash remains king. For example, Andrews Gwynne believes recent events have seen markets “irrationally disconnect from fundamentals” with reactions to both Brexit and the Trump presidential victory based on an “entirely fictional economic narrative”. Unsurprising then that the discretionary wealth manager is currently around 20% invested in cash.
“It is a drag on short-term performance but it provides us with the option to buy investments when they are cheaper,” says partner Mark Smith, pointing to recent investments in Jupiter India and HICL.
“Our cash level is high because we do not want to reinvest, even into some of our favoured investments as they too could be prone to sharp falls in the wider markets.
“With the UK and US seeing all-time highs and valuations stretched beyond all reason, why would we put private client money to work at this point?”
Still, in the firm’s defensive strategy recent additions include Jupiter Absolute Return, Old Mutual UK Specialist Equity and Premier Defensive Growth. The team has also increased holdings in a physical gold ETF and the trend-following Aspect Diversified Trends, both of which Smith believes will outperform when volatility picks up.
The latter, a Dublin-domiciled Ucits fund, is based on manager Aspect Capital’s belief that market prices are not random but display “persistent, statistically measurable and predictable behaviour and idiosyncrasies”.
From an advisory perspective, it is worth remembering not all fund selectors can make quick moves in and out of asset classes; for some it is a more considered process.
Within parameters
Austen Robilliard, head of investment research at IFA Murdoch Asset Management, stresses it can take time to get permissions from clients to make changes to portfolios and then to implement them on platform.
“Because the majority of our assets are advisory, it means we have a different investment horizon to a discretionary manager and we do not take advantage of short-term movements in markets,” he says.
“However, in November, we were becoming more concerned about valuations in investment-grade credit and had to seek other defensive assets. We needed to find something with similar risk characteristics.
“This is because, on a suitability basis, if you have low-risk clients you cannot move them over to a higher-risk asset. It meant we had to find another asset class that still met low-risk parameters.
“We found an asset-backed securities fund, Time Freehold Income, which uses ground rent assets. It is an esoteric vehicle, which is around £200m in size, but has been running since April 1993.
“When we put it through our risk para-
meters it came out with a low enough risk score for it to be considered a viable alter-
native for UK investment-grade fixed-interest funds.”
Other diversifiers Robilliard introduced to portfolios at the same time include the Marlborough Global Bond and Royal London Short Duration Global High Yield Bond, the latter on the basis that shorter-duration vehicles have the advantage of avoiding extremes in valuations.
Comeback kings
It promises to be an interesting year for absolute return strategies, many of which are now reaching maturity and, in some cases, running out of excuses for their consistent poor performance.
Kepler’s Absolute Hedge research reports that only two of its strategy indices of fund performance were able to post positive gains in 2016: in multi-asset and credit.
“Despite this, there have been some notable successes at the underlying fund level, with strong performance and asset growth,” says head of research Georg Reutter.
He suggests it is the more defensive strategies that are attracting the biggest inflows. “We continue to see strong demand for market-neutral strategies, which is reflected in a gain of £0.8bn during the final quarter of 2016,” he says.
“Equity long/short saw the largest decline in assets, with AUM now at £46.2bn, down by £2.6bn in the fourth quarter.”
From a fund manager perspective, James Mahon, manager of the SVS Church House Tenax Absolute Return Strategies Fund, believes markets are underappreciating how much inflation is building up in the economic system, and the negative impact this could have on bond markets.
He adds: “I think the current ‘rally’ in risk assets is more of a reflation rally encouraged by Mr Trump, but one has to keep a wary eye on where his policies are going. Is he actually going to reduce taxes and regulation as he claims? Is he going to move more towards protectionism or is that all just talk?
