Team Talk - Cheryl BournePosted in Financial Planning,
on 18.03.21 Read There are many things that make Fiducia a little bit different, such as our beautiful location in the heart of the Dedham Vale...
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Our Prudent Portfolio provides an investment solution for those clients who have a relatively low tolerance to and capacity for risk. Therefore, the portfolio holds limited equity funds and consists mainly of defensive asset classes, namely Absolute Return, Fixed Interest and Commercial Property funds. The objective of the portfolio is to protect existing capital values and add to these by taking carefully controlled and limited equity risk. Consequently, the portfolio has seen relatively low levels of volatility, although it is not completely immune from the more extreme movements that can occur in equity markets
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 crisis, the three funds we kept within the Prudent portfolio NinetyOne Diversified Income, BNY Mellon Real return and Church House Absolute Return ended the year up 4.6%, 6.9% and 3.8% respectively. As such we are happy to maintain investments in both strategies given their conservative mandates but have on the whole reduced exposure to this asset classes from 13% in 2020 to the current level of 8%.
In 2021 we are increasing our allocation to Hedge Funds to 11%. This is spread between the Veritas Real Return fund with its capital preservation minded quality growth style and the JPM Global Macro Fund as we would like exposure to macro hedge funds at this point of the cycle. We believe a holding in appropriately selected Hedge Funds is appropriate within a Prudent 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 via a mix of small/ mid-cap funds and large cap funds, with a bias to the later due to their defensive characteristics. TB Evenlode Income and Finsbury Growth and Income being our principal funds for this strategy.
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. Supporting this is one the leading global equity funds operating within the ESG (Ethical, Sustainable and Governance) sphere, the Royal London Sustainable World Trust.
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 the recent inclusion of the Legg Mason Clearbridge Global Infrastructure fund. The fund has a relatively conservative mandate with a target return by way of yield of 5%. 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.
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