Neil Birrell, Premier Miton’s Chief Investment Officer and lead manager of the Diversified funds, reviews the different asset classes and sees plenty of opportunities, even after a tough period for some of them.
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; patience
Patience; noun
Meaning; the capacity to accept or tolerate delay, problems, or suffering without becoming annoyed or anxious.
The last 12 months have been frustrating. I was of the view back then, as I am now, that the Diversified funds asset allocations were well set for the economic and market conditions we anticipated and, perhaps, more importantly, the underlying holdings within each of the asset classes were well positioned to generate the good risk adjusted returns we are looking for at fund level. Well, patience is a virtue I am not sure I have and if I do, it is running out!
Aligned to that, the phrase “getting paid to wait” is one that is often banded around by investors, often relating to getting paid a yield whilst waiting for a share price to start moving upwards. I thought I would have a look at that concept in relation to the asset classes we allocate to in the Diversified fund range and to try to keep it brief.
Fixed income
We look at two components of fixed income.
Firstly, alternative fixed income, investments that have bond like characteristics (steady income at attractive yields for the risk being taken), but which are lowly correlated to bonds. The underlying assets could be specialist lending or infrastructure, for example. As interest rates stayed stubbornly high, these alternatives suffered as investors shunned them in favour of bonds. Even though they had attractive yields we were not getting paid to wait, as their prices fell. However, given the levels they have fallen to, that is very much the case now.
Secondly, bonds, mainly investment grade corporate bonds. The yields available have been a revelation compared to the measly levels on offer for most of the post global financial crisis period and certainly since the advent of COVID. So, in this instance, we have been paid to wait. What are we waiting for? Interest rates to start falling and credit risk to do likewise, which would allow to put more risk into the bond exposure.
Equities
We have had more in UK small and mid-cap than we would have liked (excluding the Premier Miton Diversified Sustainable Growth Fund). The interesting feature here is that the companies held have continued to operate well and as expected, some more so, some less so, but their share prices have often remained in the doldrums as investors have shunned the UK in general and small and mid-caps in particular, other than the final quarter of last year, then we were rewarded for our patience, but that has subsided somewhat. However, we remain convinced we should tolerate the delay in the companies’ worth being reflected in their share prices.
Away from the UK, our experience has been better and the exposure to the technology sector through Nvidia, Microsoft and a range of semiconductor companies has paid off, although this has been less possible in the Premier Miton Diversified Income Fund, due to a lack of yield in that sector. There was no waiting required from the global ex-UK equity allocation to reap rewards.
Property companies
Given the turmoil in the sector as inflation and interest rates rose, the final quarter of 2023 made the year as a whole a very good one to be invested in property companies across the UK and Europe. Yields available from companies in the sector were attractive and prices rose. February was not good however, as hopes of early interest rate cuts were not met. For now, we will collect the income and wait for the prices to recover and look forward to, what we believe will be, an exciting cycle in the property sector.
Alternative investments
In this case, specifically using investment companies, which have had a torrid time and have been a big drag on performance. Many are throwing off attractive yields, so we are being paid for our patience, but it is difficult not to get annoyed or anxious. Getting annoyed is acceptable but we will remain calm rather than anxious as we do believe in the long term prospects for the asset class.
Overall
It has been a tough 12 months. As you would expect in a highly diversified global multi asset portfolio, some parts have done well, some ok and some not so well. However, we do remain convinced we are in the right areas of each asset class and when economic and financial market conditions work as we expect them to, we will be rewarded, just as we were through the end of last year.
In the meantime, whenever I speak to the managers of the different asset classes, I walk away very happy with the outlook for our selected investments, but less happy with the recent returns from some of them.
Patience is a virtue.
Out of favour; investments we don’t understand
It’s fascinating watching the price of Bitcoin and other crypto currencies. We have no expertise in them and therefore will not go near them. We think we, just about, understand the reasons why the price of Bitcoin moves up and down, but not the scale of the moves. It has often been driven by speculation, but now it seems that the introduction of ETFs for Bitcoin has taken it mainstream, with record amounts of money flooding into it, sending the price much higher.
It is not mainstream for us and won’t be until we know what we are doing and that’s some way off. In the meantime, we have plenty of diversification and we like what we hold anyway.
