Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified fund range explains that the investment team continue to be cautious and are positioning the funds accordingly.
The last note I wrote at the beginning of May, started with this;
‘In this update note a month or so ago, I wrote about our decision to reduce the equity exposure across the range of funds and for the first time, in a very long time, the increase in the bond weighting. The final paragraph was this;
I should be clear that there is no revolution taking place in the asset allocation of the funds, but this is a shift that we would expect to continue if the macro and market play book goes the way we think it might. If not, we remain flexible. In our view, this is a prudent move.
Well, we made a further shift in the same direction at the end of April; reducing the equity exposure and increasing the bond exposure (albeit in short duration high quality bonds).’
At the risk of sounding like a broken record, we made a further move in the same direction towards the end of June.
In favour; more of the same
It would be all too easy and save time, just to republish the last note with today’s date, but I think our recent decision requires a further brief explanation.
The headwinds faced by the global economy and financial markets remain the same; they have just come into starker relief and the ante has been upped. Inflation has accelerated, interest rates have moved further and economic growth is more at risk.
We believe this represents a further threat to asset prices, particularly equities, and we therefore want more exposure to lower risk asset classes and, in the case of bonds, to lower risk areas of bond markets.
The reduced equity target weighting was reallocated, in equal measure, to bonds and alternative investments. We can find some interesting long term opportunities in alternatives that should be lowly correlated to bonds and equities.
The short term is full of uncertainty, however, looking beyond the current tightening cycle, there is room for optimism for bonds and looking beyond the slowing growth stage of the cycle, equities will appear on the radar in a positive sense again. But for now, we remain cautious.
But it is worth pointing out that whilst we do not want to participate in the downside in markets, we do want to capture the upside. The funds still have plenty of opportunity to do that.
Out of favour; sterling
Foreign currency exposure usually ends up at the bottom of the agenda for our asset allocation meetings. Mainly because it is a function of all the other decisions we make and the actual allocations themselves.
Our choice is simple as sterling based funds; are we happy that we have non-sterling exposure? If sterling is weak against another currency, we profit and vice versa.
The major FX exposure we have is to the US dollar. Given that the economy there is strong and interest rates are rising quickly, unlike the UK, we are happy to remain unhedged and keep the non-sterling exposure we have.
The outlook for economies and financial markets is uncertain. Investors do not like uncertainty. We believe a cautious stance is appropriate for now, but we are looking for long term investment opportunities.