Susie Laws - Financial Adviser of the Year 2 years runningPosted in Financial Planning,
on 12.10.21 Read Fiducia Wealth Management Co-Owner and Chartered Financial Adviser Susie Laws has won the 2021 Professional Adviser Women in...
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.
While we still hold the view that economic growth will remain above trend for the remainder of the year and into 2022, we do believe we have arrived at a stage where market expectations are out of line with what they can realistically deliver. As such, markets in our view need a little time to ‘re-calibrate’ expectations to more realistic levels. Concerns over inflation, disappointing US and UK retail numbers and recent poor Chinese data suggest markets will struggle to maintain the momentum achieved year to date. In light of this unfavourable outlook, we have increased the defensive proportion of the portfolio by increasing the cash weighting from 2% to 7%. This is a position we envisage will remain in place for the remainder of the year.
In light of the deteriorating inflation outlook, where skilled labour market shortages are becoming evident in both the UK and US, we remain heavily underweight. Relative to peers, our position in government and corporate debt continues to remain low.
Our exposure is via strategic bond managers, who have a wider, more flexible remit to hunt out returns in all credit sectors. It is notoriously very difficult to ascertain exactly when inflation will ‘ramp up’ and therefore we prefer managers who are actively monitoring inflation and the credit markets, investing accordingly to their conviction.
We continue to take a selective exposure in the Government debt of favoured Asian economies via the iShares Emerging Asia Local Government Bond ETF. 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) could benefit from the structural appreciation of the currencies of countries with superior growth prospects (relative to the US Dollar).
With US inflation estimated to be in the 5-10% range for 2021 – 22 and the UK 3-6%, we therefore believe now is the time to add greater inflation hedging to the portfolio. We have done this with the inclusion of the Ruffer Investment Company at a 2% weighting. Ruffer, as an investment house, are strong believers in the inflation narrative and have positioned all their defensive strategies and Absolute Return strategies in anticipation of a sustained period of inflation. To accommodate this fund we have switched from Church House Tenex.
Technical indications at our last quarterly review indicated no movement was required in this asset class. We maintain our belief that holding Hedge Funds at this level is appropriate within a Balanced portfolio as an insurance policy and is consistent with our broader moves to help protect against any future stock market or economic setbacks. This position remains unchanged.
Our weighting remains the same at 10% however this quarter, after undertaking our due diligence, we have added the Foresight Sustainable Real Estate fund to the portfolio. This fund invests in alternative property assets such as social housing, healthcare, logistics and data centres. It has a target yield of 4% net of fees and we believe will complement the existing holdings, while uncertainty persists over office and retail property.
While retail investment have had a torrid time of late there are however signs of a recovery, indeed a reinvention in the UK retail space whereby landlords are taking the opportunity to make retail spaces more enjoyable experiences by mixing old retail with leisure facilities. While it is still early days, we watch with interest.
With regard to office space, we believe the ‘death of the office’ has been exaggerated and the likelihood is that we will move to a hybrid model in aggregate. However, the extent will differ from profession to profession. Nonetheless challenges such as health and safety, cyber security, and staff’s personal development (and progression) will need to be overcome in the ‘new normal’ working from home/office/hybrid model.
At 26%, our allocation to UK Equity remains the highest exposure within the portfolio. We continue to believe that the UK offers potential for investors, albeit not at the same levels of the last couple of years. A lot of our concerns with markets being overly optimistic about future earnings relate primarily to the US, however there are also a degree of concerns around the UK. Our strategy is unchanged with this asset class being populated with a range of defensive and growth funds complimented by the smaller cap Downing Unique Opportunities funds.
Going into Q3 2021 we have partially taken gains generated by our exposure to technology by reducing the Scottish Mortgage Investment Trust to 2%. The fund has done remarkably well for the portfolio however with its high concentration of technology stocks (which tend to do poorly in times of inflation) we believe now is the time to reduce this exposure. We have added more defensive and real economy linked Fidelity Global Dividend fund. We believe as economies return to normal patterns of expenditure, companies (and the funds that invest therein) with fortunes correlated with the real economy will benefit going forward. Therefore, introducing the Fidelity fund now, is we believe, appropriate. To recap, this fund is accompanied by the Royal London Sustainable World Trust which operates within the Environmental, Sustainable and Governmental (ESG) mandate which we believe will continue to benefit from global commitment to delivering a greener, more sustainable planet. The other fund within the global sector in the portfolio is The Worldwide Healthcare Trust managed by the leading Orbis management team. As previously commented, global expenditure on healthcare has risen exponentially since the pandemic which benefits this theme/fund. In addition, longer term demographic trends and medical innovation will see global capital expenditure continue to rise over the next couple of decades.
Despite worrying incidences of Chinese State intervention in the economy, we maintain our belief that the Emerging Markets, particularly in Asia are the most attractive equity markets due to a blend of long-term drivers, shorter-term technical dynamics including a structural depreciation of the US Dollar, and reasonable valuations. As such, we continue to pivot there with exposure via Veritas Asia and Baillie Gifford Pacific. 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. However, with the rally in commodity prices we are also reviewing commodity strong emerging markets with a view to increasing our exposure to these.
At our latest quarterly review this was increased by 2% using the sale proceeds of the Sarasin Food and Agriculture Opportunities fund. While we believe in the agriculture theme, we have not been impressed by the fund manager straying from his original mandate by investing in logistical companies with an agricultural link.
While Private Equity remains a good diversifier to standard equity funds and there are favourable dynamics for this asset class, the rally saw us ‘take profits’ in Q2 and reduce our exposure in the Balanced portfolio from 9% to 5%. Our exposure within Private Equity is to Technology and Healthcare themes via HarbourVest Global Private Equity and Pantheon International (both have circa 45% of their funds invested in these themes). No changes were made at the last quarterly review.
There have been no changes to this asset class, it remains very attractive for us in the short, medium, and long term. In the short to medium term, it will benefit from President Biden’s $3 trillion stimulus and EUs recovery programme. Our infrastructure exposure is part of a broader move to real assets in preparation for our base case scenario 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. The current mix in the portfolio is via 3i Infrastructure which specialises in (amongst other things) assets linked to the lower carbon economy and digitisation. This is complimented by Foresight Global Real Infrastructure which specialises in holding real renewable energy infrastructure assets.
We are maintaining our weighting to commodities at 6%. The WisdomTree Gold ETF is essentially an inflation hedge and shock absorber if markets sell off. Given our views this remains entirely appropriate.
We also hold WisdomTree Industrial Materials ETF. This fund was added to gain exposure to the commodities that will power the next leg of both the digital and EV (electric vehicle) revolution.
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