High-risk portfolios: High-risk funds shrug off referendum uncertainty
Brexit fears rattled UK commercial property funds and equities but in general high-risk portfolios held their nerve during the second quarter of 2016
There was surprisingly little change to higher-risk portfolios during the second quarter of 2016, despite myriad events with the potential to move markets.
Chief among these was the UK’s referendum on its membership of the European Union, which took place on 23 June. Wealth managers had been positioning themselves for the vote for many months but preparations picked up pace during the closing weeks of the quarter.
At the end of the second and heading into the third quarter there was also a panic over UK commercial property.
Major UK property funds found the pace of investors’ withdrawal requests too much to handle and suspended trading or applied value adjustments to gate investors in.
Cautious optimism
UK equities were also in the firing line, but the money pulled from this asset class largely found its way into other equity markets, leaving the average equity holding similar to that as at end of the first quarter, 69.2% versus 70.8%.
Andrew Wheeler, head of business development at Kleinwort Benson, says his firm has remained “cautiously optimistic” on equities despite the macro uncertainty.
The firm’s higher-risk portfolios maintained a 70% exposure to equities in the second quarter, virtually unchanged from the end of the first quarter. This put the company in line with the peer average.
“We took a bit of money off the table in UK equities early in the build-up to the referendum, but this was reinvested in the Pacific region and Japanese equities,” says Wheeler.
“It was more about the opportunities elsewhere than wanting to cut back UK equities. We do not see equity valuations as particularly stretched, and they are generally within the mid-range of what we would expect.”
Fixed income allocations across higher-risk portfolios remained steady as well, at 11.3% versus 11.1% at the end of Q1.
Kleinwort Benson also held the fixed income portion of its higher-risk portfolios close to static, Wheeler says. The allocation is split across government bonds and investment grade corporate bonds.
Alternatives allocations at the higher- risk end of the spectrum were reined in to some degree over Q2 to 6.3%, from 7.2% at the end of the first quarter.
The most notable move for Kleinwort Benson on the alternatives side was taking UK real estate down to zero, from a holding of 5%.
Heavy metal
Wheeler’s team had exited its UK property position well in advance of the Brexit vote, and before the gating of funds, to emerge unscathed from the troubles.
“We decided to get out of UK property ahead of the referendum, which turned out to be a very good move,” he says.
The cash released from property was reinvested into diversified commodities, Wheeler says. He adds that this predominantly went into precious metals investments rather than energy, in order to create balance between the two within the allocation.
“As we make our way through the third quarter of 2016, something the asset allocators at Kleinwort Benson are watching very closely is a counterintuitive absence of volatility,” says Wheeler.
“Given what has been going on around the world, it is surprising that the CBOE Volatility Index has been on the low side.”
He adds that any uptick in this around events such as interest rate decisions, elections or referendums would warrant a careful look at allocations.
