Medium risk portfolio strategy

The general trend of increasing equities in medium-risk still prevails but there are subtle shifts within this space that are not necessarily visible within the data

Medium risk portfolio strategy


However, looking beyond the average data, numerous invisible trends are shifting the picture. The indices do not tell the full story of what is happening because even though investors are clearly keeping assets in equities, how they invest in this space is changing.

Prime movers

At the end of Q1 2014, the medium risk Trustee MPI had a 55.8% allocation in equities, up from 53% in the same quarter 2013. Alternatives allocation has risen by 2.8% to 11.6%, having taken up 8.9% in the same quarter last year. This marks the biggest change within the data set.

Meanwhile, fixed income shed 4.8% year on year, to 21.1% from 26% in the first quarter of 2013. The biggest mover, alternatives, is something of a wild card when it comes to understanding the medium risk picture. The Trustee MPI definition includes real estate, private equity and commodities as well as funds of hedge funds. The individual investor definition differs somewhat from case to case, as do the trends within the portfolio allocation of equities.

Banking the profits

For Duncan Gwyther, chief investment officer at Quilter Cheviot, there has been a shift towards decreasing risk in the equity content of medium risk portfolios.

“We slightly backed off risk exposure a few months ago,” he says. “We thought it was time to bank some of the profit we got from equities.”

In the past quarter he cut tech and high-value stocks such as social media companies. On the other hand, he has seen a good performance in commercial property stocks where he increased his portfolios’ exposure in August and September 2013.

Although things started off slowly in the first months, commercial property recently picked up and has delivered returns.

Alternative thinking

While the overall trend indicates that many investors are still choosing to reduce exposure to fixed income, some investors have pursued alternative strategies.

“We believe the industry is bereft of ideas in the traditional fixed income space, but we have a number of interesting more specialist ideas,” says Joe McLoughlin, co-head of private clients at GAM.

GAM’s fixed income strategies include insurance-linked securities as well as long/short credit and floating rate notes.

In medium-risk buckets, McLoughlin and co-head of private clients Christian Flackett hold 25% in fixed income, 53% in equities, 18% in alternatives and 4% in cash. The team has reduced exposure to equities in medium-risk portfolios since the beginning of the year by close to 5%.

“The past two years have been strong so we expected 2014 to be a volatile year,” says Flackett.

“Investors have been focused on growth and momentum-oriented stocks but are now moving to more value-oriented stocks, and the focus is on earnings. We have added companies set to benefit from increased global capital expenditure, which has been pent-up since the global financial crisis.”

Two areas that the team does not have any assets in are property and private equity, two pillars of alternatives allocation.

However, global macro-funds are generally a favourite featuring in medium-risk portfolios.

“Many investors increased their alternative stocks almost by default,” McLoughlin says.
In an interesting move, the team at GAM added 4% cash into the allocation mix at the beginning of this year, having not held any in the previous year.

Flackett says: “It’s a response to the market that is not at its best. This is a big proportion of cash for our medium-risk portfolio.”

Medium risk: investment horizon of 3-10yrs; volatility of 6-10%; drawdown <20%



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