“We don’t view Brexit as a massive negative,” says Morgan. “Economic reality will kick in, there will be some sort of deal and companies will react.”
The biggest negative for the UK, he adds, is the fact that a large part of the economy is consumer-orientated and there is a continued squeeze on imports. In addition, he is cautious on UK shares given they are “pretty much fully valued”.
“We don’t see a likelihood of the FTSE surging north of 8,000,” says Morgan, “but I said the same thing when it was at 6,000.”
As part of their UK equity exposure, Morgan and Waite hold Neil Woodford’s UK Equity Income Fund, which makes up about 2% of the equity allocation. Despite a tough few months for the manager, during which Jupiter’s multi-manager Merlin range pulled £300m from the fund, they remain loyal investors.
“It acts as a diversifier within the portfolio because what Woodford holds and is overweight in is typically not in the portfolio elsewhere,” says Waite. “If you look at Woodford’s history, his process is consistent and conviction-led. He has had a number of stock-specific disasters but it is one of those things; you can go on these runs.”
Looking globally, Waite says “everything is rosy” in terms of GDP, and if Trump can push through tax reform then the S&P could continue to reach new highs. However, he is wary that the lofty heights of the stock market has a whiff of “House of Cards” about it.
“Ever since Trump has come in, markets have risen on the expectation of what he is going to do but he hasn’t done anything. And now they are going to rise again on the expectation of what he is going to do.”
That said, Walker Crips is marginally overweight the US but accepts valuations are “toppy” at the moment.
Elsewhere, Europe has been a “bright spot” of late but Morgan is cagey as to whether its strong run might be coming to an end as the uncertainty over the political situation in Spain with Catalonia and Italian elections next year take hold.
“It takes an idiot to predict anything political but that is another reason why we are cautious on Europe,” he says. Walker Crips is accessing Europe via the Blackrock Continental European Equity Income Fund, managed by Andreas Zoellinger and Alice Gaskell, which has a focus on northern Europe rather than the periphery.
The portfolios are also slightly underweight fixed income in the expectation that interest rates will rise. For a conservative client of Walker Crips, the benchmark for fixed income is 40% and the allocation is to high quality, big liquid names the pair can be confident of exiting from if necessary.
Another necessity is short-duration fixed income whose sensitivity to interest rate rises is less.
“We limit the maturity to five years and we aim to hold those bonds to maturity,” explains Morgan. “By doing so, any move to interest rates or capital value is pretty much irrelevant because you are holding them to par value and riding out fluctuation in the meantime, and then collecting the coupon.”
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