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...
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
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 7% to 10%. 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 have reduced our Bond exposure further by 2%. On a relative basis 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 although this has been reduced slightly this quarter (reduced by 2%). 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 4% 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 both Church House and the Ninety One Diversified have been reduced by 2% each.
Technical indications at our last quarterly review indicated a 1% increase in this asset class was appropriate. The minor increase was added to the Veritas Global Real return fund. We maintain our belief that holding Hedge Funds at this level is appropriate within a Prudent 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 25%, 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. For this reason, we have removed Miton UK, the Multi-cap fund, from the portfolio as it exhibits higher risk/less defensive characteristics than the other UK funds within the portfolio and therefore more susceptible to markets sell offs.
Going into Q3 2021 we have taken gains generated by our exposure to technology by selling the Scottish Mortgage Investment Trust. While the fund has done remarkably well for the portfolio the fund is slightly higher risk than we feel comfortable holding for too long. It has been a very good tactical call, however with its high concentration of technology stocks (which tend to do poorly in times of inflation) we believe now is the time to sell. In its place comes the more defensive and real economy linked Fidelity Global Dividend fund. We believe as economies return to normal patterns of expenditure, companies (and funds that invest therein) with fortunes correlated to 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.
There has 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.
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