While manager Tony Lanning is retaining his overall preference for equities, the current state of valuations has required a risk reduction, with slivers taken from across the portfolio.
Having initially raised his cash position to 6% of the JPM Fusion Balanced Fund in March, Lanning has since increased this to 9%, in lieu of reducing his European ex UK equity exposure from 24.5% to 21.5%.
“In the medium-term we are constructive about risk assets, but we feel that prices have got a little bit ahead of themselves,” he expanded.
“We have taken money out across our portfolio – rather than going medium-term defensive, we see it as dry powder to invest in the market.”
Some of this money has been put to work in the commodities sector, with Lanning buying some exposure to the gold mining industry.
“We are underweight commodities as a whole, but have taken a 2% position [of the Balanced portfolio] via the iShares Gold Producers ETF,” he expanded.
“In terms of valuation there are pockets of cheapness, and gold generally performs best in an environment of abundant global liquidity and low or negative real rates. Also, there is a trade in the market of being long US dollar, and this trade should do well with the dollar weakening.”
The ‘easy money’ has been made
On the fixed income side, Lanning continues to be cautious on the market overall with a 15.5% weighting in the Balanced portfolio.
A large part of this is represented by US and European high-yield holdings, with 4.5% invested in the Nordea European High Yield, NB High Yield Bond and BlackRock Global Funds High Yield Bond vehicles.
“The ‘easy money’ in fixed income has already been made,” Lanning said, responding the view that high-yield is no longer ‘high-yield’. “However, if you are getting 60 basis points on a German bund then the yields that you can get from European sovereigns are quite high, so that observation needs to be taken with a certain amount of context.”
While he is comfortable with his current holdings in the market, Lanning concedes that there is a cause for apprehension.
“We are very focused on liquidity, and have had concerns around the liquidity around high-yield for some time,” he explained. “A lot of people that are not necessarily long-term bond holders have – understandably – ploughed money into the space, and when they start to look towards the exit door it will be much smaller than it is now.
“As we have seen from the back-up in sovereign bond yields [on 17 April] liquidity in markets is thin, and as we go through the summer it is not going to get any better. If liquidity was better, then we might have more exposure to the market.”
