Retirement Planning - How can I retire at 60?Posted in Financial Planning,
on 29.07.21 Read For those of us hoping for a life of leisure from the age of 60, the obvious question is “How much do I need to retire...
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The Balanced Portfolio provides an investment solution for those clients who have a medium tolerance to and capacity for risk. The portfolio has a highly diversified strategy with weightings skewed in favour of growth over defensive assets.
The portfolio was composed based on our 10-year strategic view of the key themes that will drive returns going forward. Aligned to our strategic views are the shorter-term tactical view for each of the respective asset class and sectors.
Below is a summary of some of the current tactical calls within the Balanced Portfolio.
Our positioning in government and corporate debt remains low on a relative basis; we consider the attractions of such investments to be minimal at this juncture given the low interest rate environment globally. Furthermore, such fixed income securities are vulnerable to notable capital losses in the event of any (surprise) increases in market interest rates and may not protect as much in the event of sudden shocks to financial markets, as they have in past episodes due to the low interest rate starting point. Where we see opportunities for diversification and potential returns in bonds is within the Global Bond sector and specifically with strategic, bond managers who have a wider, flexible remit to hunt out returns in a challenging sector, tilting into or away from opportunities or risky sectors respectively. In 2021 we are taking a selective exposure in the Govt debt of favoured Asian economies. The countries that we are targeting on the whole have much lower deficits and positive real interest rates so can be perceived to be more attractive than some western government bonds based on underlying fundamentals. Furthermore, yields are competitive. In addition, holding foreign currency debt (non-hedged) where possible could benefit from the structural appreciation of the currencies of countries with superior growth prospects (relative to the US Dollar).
In an environment of low interest rates, low government bond yields and post Covid 19 question marks over commercial property there is a dearth of defensive assets to provide uncorrelated returns on a real return basis. While Absolute Returns (in aggregate) failed to provide the defensive ballast at the height of the crises the two funds within the Balanced portfolio BNY Mellon Real return and Church House Absolute Return ended the year up 6.9% and 3.8% respectively. As such we are happy to maintain investments in both strategies given their conservative mandates.
In 2021 we are maintaining a 5% allocation to Hedge Funds but switching away from Veritas Real Return with its capital preservation minded quality growth style into JPM Global Macro Fund as we favour macro hedge funds at this point of the cycle. We believe a holding in appropriately selected Hedge Funds is prudent within a Balanced Portfolio as an insurance policy against any future stock market or economic setback.
The pandemic’s impact is most keenly felt with the material uncertainty that clouds the outlook for this asset class. Going into 2021 we are maintaining the strategy we put in place in Q3 of last year, which is to avoid direct ‘bricks and mortar’ exposure, maintain a UK position via a generalist REIT with a relatively smaller exposure to UK Office Space and Retail, while directly allocating to one of the few growth themes within UK Property – Logics and Warehousing via the Urban Logistics REIT. In addition, we have diversified exposure away from the UK with the inclusion of the HSBC Global Property fund which provides exposure to areas of potentially higher growth property, including certain markets of Asia.
Prior to the pandemic the UK equity market was one of the cheapest worldwide despite offering a higher dividend yield than most relatively comparable markets. The discount can largely be explained by the uncertainty around Brexit and prior to that by the spectre of a Labour government. Minded of this our positioning was to be overweight the UK going into 2020. The pandemic knocked off course the anticipated recovery and with it the FTSE 100, largely due to the underperformance of Financials and the Oil majors. With Brexit ‘resolved’, oil prices now back over $50 mark and a positive yield curve being beneficial for Financials, the UK should make up some ground in 2021 in our opinion, as global asset allocators warm back up to allocating to Sterling assets. Our strategy is to gain exposure to broadly equal mix of small/ mid-cap funds and large cap funds. In the former this is via funds such as Downing Unique Opportunities and Slater Recovery and in the latter through TB Evenlode Income and Finsbury Growth and Income.
Going into 2021 we are maintaining the tactical strategy, commenced in Q3 2020 of thematic investing with exposure to sectors that have, continue to and ultimately will be the winners, from an investment perspective of the post pandemic world – Healthcare and Technology. The former via the Worldwide Healthcare Trust and the later via Scottish Mortgage Investment Trust and First Trust Cloud Computing ETF. The First Trust ETF is a direct play on the technology ecosystem that sits below the FAANGs (Facebook, Amazon, Apple, Netflix & Google) that has become ubiquitous with the way we are all now leadings our lives. Online document/photo/file storage, the use of Zoom, electronic signatures, online shopping and cyber security to name but a few, are all essential to the whole online environment. Supporting this is one the leading global equity funds operating within the ESG (Ethical, Sustainable and Governance) sphere, the Royal London Sustainable World Trust.
We maintain our belief that the Emerging Markets, particularly in Asia are the most attractive equity markets at present given a blend of long-term drivers, shorter-term technical dynamics including the depreciation of the US Dollar, and reasonable valuations. As such we continue to pivot there with exposure via Baillie Gifford Pacific and Veritas Asia. Broader Global Emerging Exposure is gained by holding the Baillie Gifford Emerging Markets Leading Companies fund. In aggregate our exposure to Emerging Markets is dominated by investments in Asian companies due to our confidence that the region will take strides forwards in coming years and decades.
Private Equity remains a good diversifier to standard equity funds and we believe there to be favourable dynamics for this asset class, chief among them are the availability of distressed assets and the need for swift turnarounds for which PE managers are renowned. Our current exposure within the Balanced portfolio is to generalist PE strategies and to Technology and Healthcare – two of the prime beneficiaries of the pandemic and beyond. By way of example, both HarbourVest Global Private Equity and Pantheon International have approximately 45% of their portfolios positioned in these two themes.
In Q3 2020 we re-focussed our positioning to gain access to Renewable Infrastructure which we believe will be a prime beneficiary of global government spending designed to stimulate the world economy post pandemic, as well as to benefit from wider ESG trends. This strategy is complimented with exposure via the 3i Infrastructure funds exposure to the trend of digitalisation and the need to build related infrastructure, such as towers and data centres. This remains our current strategy. As an asset class our allocation to Infrastructure is part of a broader move to real assets in preparation for our base scenarios that we will see inflation rising over the next two years. Cash flows within this sector are typically inflation-linked on a contractual basis to a significant extent, helping such investments to protect capital against long-term rises in the price level.
In early June 2019 we took an early position in Gold as part of a broader move to real assets for preparation potential inflation and protection against market volatility. We maintain a position in Gold in anticipation both will remain in 2021. The elevation of government debt in response to the pandemic – and with that being from a very high starting point – further reinforces the benefits of viewing gold as a quasi-insurance policy against the long-term effects of currency debasement or longer-term inflation risks. In addition, with an in increase in the Commodities asset class as part of Strategic Asset Allocation review, we have added WisdomTree Industrial Materials ETF. Our aim with this strategy is to also gain exposure to the commodities that will power the next leg of both the digital and EV (electric vehicle) revolution during the recovery phase post-Covid.
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