Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified fund range discusses an asset allocation change that has been a long time coming.
This is a brief note to provide an update on a recent asset allocation change implemented across the range of six Premier Miton Diversified funds. We will write more on this in the quarterly update note and monthly fund commentaries.
I won’t run through the background to the inflationary and rising interest rate environment we are in; you are well aware of that. But the pressures are accelerating, and central banks have to act strongly, as evidenced by the comments this week from Lael Brainard, who is expected to be the next vice-chair of the Fed.
The focus on asset allocation over the coming months is key as we approach what might be a pivotal time in the global economy and financial markets.
In favour; bonds (it’s been coming)
I have been writing these notes for a long time now. Bonds have regularly featured in the “Out of favour section” as the Diversified funds’ investment team didn’t see strong merits for them as a portfolio diversification tool or the risk / reward profile as attractive enough in a multi asset portfolio. In the Diversified funds that did hold bonds, they were lower risk.
Buying bonds in this environment may seem counterintuitive. But yields have risen a long way and, as always, asset prices discount future expectations. Furthermore, we are concerned that necessary central bank policy shifts will hurt economic growth, possibly lead to recession and all that brings with it. The fact that central banks have left it late to react to inflation, means they have to act hard and fast. That makes a “soft landing” (remember that phrase?) difficult to orchestrate.
Therefore, considering the expected macro environment and looking beyond the current weak bond markets, we believe bonds will be a good asset class to be in. Indeed, given the yields on offer today and interest rate rises priced in, we see value now.
We are focusing on short dated US Treasuries and high quality short dated UK and European credit; hardly very risky! We are not taking on any significant duration or credit risk.
(Out of) Less in favour; equities and cash
Equities have provided the bedrock of the Diversified funds and continue to do so, but we have reduced target weights across the range. In fact they are still higher than they have been in the past. But equities could suffer in a slowing growth environment. We will manage the asset allocation to equities and the equity portfolio accordingly.
Also, we have been holding relatively high levels of cash for some time. Given inflation is eroding its value and bonds are providing better returns, now looks like a good time to switch from cash to bonds.
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.