In favour / out of favour

Neil Birrell

Premier Miton's Chief Investment Officer

Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified Fund range explains that the investment team continues to be cautious and are positioning the funds accordingly.

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).

In favour; more of the same

It wasn’t a difficult decision given the numerous headwinds the world economy and financial markets are facing. We are continuing along the road of risk reduction for the Diversified funds and also preparing to take advantage of the opportunities that we believe will occur at some point.

In the meantime we are looking to protect against any downside in markets. To that end, the portfolio hedges we have in place are an important factor.

As equity markets have fallen, the put option strategies we have in place have been profitable and have become increasingly sensitive to further markets falls. The put options are on the S&P 500 Index and the NASDAQ 100 Index. They are near their strike levels and expire in June, thus providing downside protection as those indices fall.

Through all the volatility in various asset classes during the pandemic, option prices have become more expensive. Volatility is an important factor in option pricing. It is essential that we pay the right price for the cover we are taking and therefore use a flexible approach. We have put options that are contingent on other factors, for example the oil price being above a certain level or a currency exchange rate. We can create these with the objective that if one of the features of the option happens, it is very likely the other will as well. This just makes the option cheaper to buy.

We also have holdings that benefit if volatility rises, that is usually associated with falling equity or bond markets and other positions that benefit when there is dispersion in the movement in the share prices of large US stocks; that has worked well in the current corporate reporting season.

We still have plenty of equity exposure as there are still many companies we like and want to invest in for the long term. But, we can’t control their share prices and want to protect the funds in falling markets, when they occur.

Out of favour; sterling

We have not had any sterling hedges in place since the middle of last year. That has worked well recently; in fact, in April, sterling had its worst month against the US dollar since October 2016, which was just after the Brexit referendum. The UK economy is not in good shape and whilst interest rates are on the rise, they won’t be matching the rise in US rates as the economy there remains more robust. It is difficult to see the move in sterling reversing for now, so we will remain unhedged and have a good degree of US dollar exposure.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Equities (shares) can experience high levels of price fluctuation.

Where investments in a fund are denominated in currencies other than sterling (for example, if a fund holds assets priced in euros), its value will be affected by changes in the relevant exchange rate. Certain other investments, such as the shares in companies with profits from other countries, will also be effected.

Put-options are a type of derivative and can be used for a number of reasons. For example, they can be used to protect the value of an underlying investment or group of investments against a fall in value. They can be thought of as an insurance policy. These can make a fund more volatile from time to time.

Some of the Diversified funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used.

Future forecasts are not reliable indictors of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the fund range’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion is issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

006536/030522

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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