Low-risk portfolios: Treading carefully
Trepidation rules the day, while being active in currency positioning can boost returns in low-risk mandates
The Low-risk index returned 2.3% over the second quarter of 2016. Due to a fall in sterling of 6.9% versus the dollar and 4.8% versus the euro, holdings in US and European securities will have been beneficial to the portfolio.
Nigel Cuming, chief investment officer at Canaccord Genuity Wealth Management, says the firm’s cautious to low-risk portfolios consist of 46% in bonds, 32% in equities, 12% in alternatives and 8% in cash.
“We marginally reduced UK and European exposure during the quarter, and we are maintaining relatively high cash levels because we felt the action by the Bank of England was unlikely to provide much support to the real economy,” says Cuming.
“We live in a time where markets are being manipulated because investors are forced to chase yield.
“The Bank of England’s measures may encourage consumer spending in the short term but, given that many investors will be getting even less of a return from cash deposits, they are likely to emulate the Japanese over the past two decades and spend less. An economic recovery largely based on credit is not sustainable.”
Regarding the UK economy, Cuming says: “From a wealth manager perspective, I’m quite nervous. We do not believe monetary policy, by itself, is sufficient to accelerate global growth and it has to be supported by fiscal stimulus.”
A phoney war
The structural and liquidity issues of holding property funds does not make the asset class a great diversifier, in Cuming’s opinion. Therefore, Canaccord has under-owned it as an asset class for a long time.
Investors are facing a period of “phoney war”, says Cuming, because people have forgotten about the implications of Brexit and are acting as though the problem has gone away. He believes the UK is likely to go into a recession later this year or early next.
“There is growing talk of what I would call physical quantitative easing. There is a growing possibility of both the UK and the US governments loosening their spending rules and embarking on massive infrastructure spending projects,” says Cuming. A sense of this happening has, he believes, helped fuel the recent risk asset rally from the post-Brexit vote lows.
He adds that in the present uncertain environment, with asset class bubbles being created by central bank activities, it is important not to position portfolios to one view of the world and to ensure there is sufficient exposure to genuine risk diversifiers such as cash, government bonds and alternatives.
Peter Smart, head of group fixed income portfolio management and divisional director at Brewin Dolphin, reports that the firm’s allocation in low-risk portfolios has not changed greatly during the past quarter.
He says: “The market-moving events of the summer had initially prompted a cautious fixed income stance and, as such, gains that subsequently came from currency allocation have been very beneficial to us. However, we are not particularly looking to extend our currency position from here.”
Smart is positioned against the benchmark, with a bias to gilts and high quality bonds after Brexit.
He says: “We anticipated more volatility a year ago and we moved slightly higher up the credit spectrum to a more emphatically weighted BBB/A-rated stance from a lower quality, more specific BBB-rated credit view.
“As we stand right now, we recognise the possibility that US Federal Reserve fund rates will move higher.”
