Low risk portfolios: Cash is the trump card
Many managers looked to safe havens during the third quarter, while inflation remains the biggest concern
Kristen McGachey
A general mood of caution was evident during the third quarter, with many private client investors turning to cash for their lower-risk mandates.
For Rathbones Total Return Portfolio manager David Coombs, combatting the political uncertainty in the west means retaining unusually high cash levels. Currently, cash represents 31% of the portfolio, the highest it has ever been. The rest of his low-risk portfolio is made up of 11% in low-duration investment-grade bonds; 28% in equities, 7% of which are UK and 21% overseas; 11.5% across absolute return strategies; 2% gilts; 2.5% in US treasury inflation-protected securities (Tips); 2.5% in UK inflation-linked bonds; and the remainder in diversifiers.
In addition to drastically upping available cash, Coombs also positioned for a Trump win, disposing of Tips prior to the election.
“I didn’t predict Brexit would happen or that Trump would win,” he says, “but I positioned the portfolio for both eventualities as I believed Brexit had a 50/50 shot of happening, as did a Trump victory. That’s high enough for me to position for those risks.
“If Remain or Clinton had won, it wouldn’t have had a big impact on my portfolios.”
Taking a chance on risk
Coombs purchased equities he felt would benefit under president Trump, such as defence company Lockheed Martin, and added to his healthcare positions.
Moving forward, Coombs is favouring structural growth businesses rather than cyclical companies.
The initial conditions created by a Trump win have emboldened him to take a chance on riskier equity investments.
“There is no investment that absolutely can’t be in a low-risk fund, especially when you have such high levels of cash,” says Coombs. “I own biotech, e-gaming stocks and private equity in my fund. Again, I am looking for growth and structural investments that are less prone to economic cycles of inflation.”
However, according to Coombs, the prospect of UK inflation is far more worrisome than the potential implications of Trump’s protectionist policies.
“Even if tariffs go up a few percentiles as a result of Trump’s policies, it will not be as as doom-laden as the analysis being pushed out there. Inflation, on the other hand, really worries me, and it is more of a possibility in the UK than the US.
“Sterling could well continue to fall against the dollar if a lack of clarity around Brexit causes complete confusion for an extended period. That’s not helpful for the currency or the bond market.
“Right now, I’m worried about adding to any sterling bond markets, even index high-duration. That’s why I hold cash and why my equity holdings are concentrated on structural growth companies that have pricing power, to hedge against that inflation.
“UK inflation, lack of clarity around Trump’s policies and eurozone political risks are the three things that keep me awake at night. I hold cash to protect the portfolio.”
The big shift
Edward Loader, director of discretionary investment management at Royal Bank of Canada, reduced Japanese equity exposure from an overweight to a neutral position during the quarter, while also trimming European and UK equity. The firm has favoured the US, in particular small caps.
He says: “We’ve also switched to more of a large-cap focus in our UK equity allocation. These shifts have been consistent across risk profiles. Within fixed income, we have switched some of our allocation from domestic credit to global credit but remain shorter-duration, with higher credit exposure relative to benchmark.”
In its conservative multi-asset portfolio, the Royal Bank of Canada has around 4% cash, 49.3% in fixed income, 26.7% in equities and 20% in alternatives.
