Premier Miton Diversified funds
Neil Birrell, Premier Miton’s Chief Investment Officer and lead manager of the Diversified funds, details asset allocations changes across the fund range in December.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
In favour; more risk
There was always going to be a peak in the interest rate cycle and expectations have moved so far, that it could even be as early as March in the US, rapidly followed by the UK and Eurozone. Clearly, there is a risk that expectation is not met, but it should not be long after that.
Furthermore, that change in outlook brought about a change in market direction and leadership. Bond yields fell sharply from the latter part of October to year end and equity markets were strong. Within equities medium and smaller companies’ prices started performing, particularly in the UK, property companies rallied strongly, and the alternatives sector improved as well.
After a tough period for the Diversified funds’ returns through 2023, the final quarter showed improvement as a result of the market moves; the portfolios showed the sensitivity we expected. However, we waited until December to make an asset allocation change. We sought a higher level of surety that the peak in interest rates was approaching and the Fed’s “pivot” in December provided that.
We reduced the target weight for cash by 2% and added that to the equity weighting, specifically the global ex-UK portfolio. The UK equity portfolio weighting is at a level it has not been historically, and the funds have sufficient sensitivity to UK medium and small sized companies. Meanwhile the global ex-UK portfolio is well balanced by sector, a healthy weighting in the US and little “magnificent 7” exposure. The Diversified Sustainable Growth Fund does not have a specific UK equity allocation, so 2% was added to the overall equity portfolio.
However, there is room for disappointment. If interest rates do not start coming down as hoped, asset prices are at risk. Therefore, we took advantage of the relative cheapness of put options at present and added a small holding in a S&P 500 Index put option to provide some protection for the equity portfolio should that happen.
It is also worth noting that, ahead of an expected increase in bond issuance in the new year, some of the less attractive bond holdings were sold or reduced in order to have cash available to take advantage of new bonds that are issued.
Out of favour; cash
With the returns on sterling, US dollar and Euro cash deposits looking set to fall through 2024, maybe starting in March, the attraction of the very low risk returns they have been providing is beginning to wane. Whilst the risk remains low, the returns are likely to fall, the opposite of what we see happening in equities.