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Asset allocation: how 10 advisers are investing in 2017

How 10 advisers have invested this year.

How are advisers investing in 2017?

It may be hard for some to believe, but it is already March.

So far this year we have already seen Donald Trump become President of the US, the UK government trigger Article 50 to begin the process of leaving the EU, and George Osborne take three jobs.

With everything going on in the world here's how ten advisers are adapting and changing their investment strategies.

How are advisers investing in 2017?

It may be hard for some to believe, but it is already March.

So far this year we have already seen Donald Trump become President of the US, the UK government trigger Article 50 to begin the process of leaving the EU, and George Osborne take three jobs.

With everything going on in the world here's how ten advisers are adapting and changing their investment strategies.

Keith Relf, managing director, Pembroke Financial Services

Keith Relf, managing director of Shoreham-based Pembroke Financial Services, says it is highly probable the firm will make fund and asset allocation changes in 2017. This is because it is likely to be an ‘interesting year’ politically and in the investment world.

Pembroke has made significant changes since the Brexit vote last year. ‘We replaced some of our strategic fixed income funds with the Vanguard UK Long Duration Gilt Index to add protection from any potential equity market volatility. This worked well for Q3,’ said Relf. ‘We have switched out of Vanguard into a selection of high-yield bond funds, which focus on the UK and overseas.

‘In the UK, we have moved our focus to large and mega-cap oriented funds in recent quarters but we are likely to review this given the recent general rotation into value stocks. We tend to focus on value rather than growth generally. We have also made marginal moves back into emerging markets in the past two quarters.’

The firm has made two wider changes to asset allocation in its cautious and balanced portfolios in recent years. The first was to move towards the global sector and away from the UK. The second was to use more multi-asset and target return funds to reduce volatility and provide an alternative to the sometimes illiquid commercial property sector.

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Jason Bevan, partner, Gracechurch Wealth Management

Milton Keynes-based Gracechurch Wealth Management has made a significant number of changes to reflect market events in 2016 and has been happy with the results overall. ‘To avoid the Brexit turmoil, we sold down early our exposure to UK commercial property, which had a significant allocation to London,’ said partner Jason Bevan. ‘We also reduced exposure to UK markets, due to the currency risk.

‘In April, we introduced global infrastructure holdings both for diversification and significant return potential. This proved successful and we will continue it in the medium term.’

Gracechurch decreased US exposure gradually in 2016, reflecting concerns about the US election. It replaced this with exposure to parts of Europe and emerging markets.

However, Bevan said now might be the time to increase US exposure. This is due to Trump’s promised corporate tax cuts, infrastructure spend and creation of US favoured trade deals.

Bevan said in the new year rising yields, lower economic growth and high volatility might become headwinds for investment returns. So the firm is looking to reduce fixed interest exposure and will probably increase UK equity exposure if there are significant dips in the market in early 2017.

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Mohsin Bukhari, head of investment research, Carrington Investments

London-based Carrington Investments reviewed its investment proposition last year. This led to two key changes the firm plans to implement.

Mohsin Bukhari, head of investment research, said: ‘The first change is to maintain a minimum exposure to the main equity markets, regardless of market conditions. Historically, we have reduced our exposure to zero in certain markets we were negative about. Now we think maintaining a broad allocation is better for long-term returns.

‘This is because we have made wrong calls, which hurt performance disproportionately. For example, in 2013, we held a lot of cash, which turned out to be the wrong call. This position has changed in the past two years, so shorter term numbers are markedly different.’

The second change is to include more exchange-traded funds and smart beta products, such as those using tilts towards value and small cap stocks. This will help reduce costs.

Carrington uses macroeconomic and technical analysis in setting asset allocation. ‘This separates us from most asset allocators, as technical analysis is not widely used in the UK,’ said Bukhari.

‘The charts provide a non-emotional view of most markets and either confirm or contradict our macroeconomic views. We use long-term charts for asset allocation and shorter term charts for timing. We are active and change our models five times a year on average.’

Tim Whiting, managing director, Timothy James & Partners

Around 85% of London-based Timothy James & Partners’ (TJP) £1 billion assets under advice are in in-house portfolios. Managing director Tim Whiting said these had outperformed competitors over the past few years, partly because the TJP portfolios were more concentrated.

‘I believe in diversification but I don’t need 25 funds with 70 holdings each to achieve a given risk level,’ he said. ‘That’s 1,750 holdings. It drives me mad. It’s a compliance-led industry process but it is not best for the client.

‘If you want to take risk in an asset class, take a well-thought-out risk and back a few experienced, talented managers. Don’t use buckets of blancmange. They are not focused enough.’

Whiting and his team develop their asset allocation views from speaking to top fund managers and economists regularly, together with in-house research. His most forthright conviction is that UK shares will be the strongest performing asset class over the coming months.

‘Asia’s growth story will continue for a while but you need experienced fund managers who understand the markets. The US has had a great period and that will continue. I’m happy to let our existing funds in international equities run.

‘Currency is having the biggest impact. For new investments, I’m not keen on global equities because I don’t want to risk sterling returning to its long-term trend against the dollar and the euro. That would give them a 20% hurdle to jump.’

Whiting said the UK was about to ‘have its moment in the sun’ compared with other asset classes.

‘This is not just about large caps,’ said Whiting. ‘We have full employment, which will support consumer spending, so the [smaller caps] will do well.’

Whiting said a weaker sterling would redress the domination of the UK economy by financial services, which has distorted asset classes such as property.

Share prices will therefore be supported by ‘institutions around the world investing in the UK’s good dividend paying companies, which are 20% cheaper than they were a year ago,’ he said.

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Alan Cram, head of investments, Ellis Bates Financial Solutions

Harrogate and Newcastle-based Ellis Bates Financial Solutions has favoured equities in its model portfolios in recent years. It has not taken any significant over or underweight sector or geographical positions in the past two years.

It keeps an exposure to small and mid caps, which have delivered above average long-term growth, according to Alan Cram, head of investments.

‘Factors including interest rate uncertainty, currency fluctuations, the Brexit vote and the US election led to a more neutral approach,’ said Cram.

‘We have focused on diversification, as we see potential for heightened volatility across markets.

‘We have also monitored currency exposure closely, due to the increasing impact of exchange rates fluctuations. Two funds are currency-hedged and we may introduce another, particularly relating to euro exposure due to political risk related to elections in the eurozone.’

In the past 18 months, the firm moved increasingly towards short-dated and strategic bond funds. Cram said it is considering reintroducing the TwentyFour Asset Management Monument Bond, which focuses on asset-backed securities.

‘If interest rates are set to rise, the floating interest rate nature of the fund offers upside potential,’ he said. ‘Plus the yield is healthier than on short-dated alternatives.’

In December, Ellis Bates recommended clients to sell their holdings in direct property funds from its in-house portfolios. Cram said this is because of the ongoing review into how the funds should be structured following the liquidity and valuation issues they experienced after the Brexit vote.

‘We would like to hold direct property as it can behave differently from equities and bonds, and deliver long-term performance,’ he said. ‘We removed our allocation, partly to see whether the fund structures will change, which I hope they will.

‘Moving away from daily dealing and pricing would not necessarily deter the longer term investor. But it would bring operational issues, regarding use of the funds on platforms and within model portfolios.’

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Tom Sparke, investment management, Gibbs Denley Financial Services

Cambridgeshire-based Gibbs Denley Financial Services claims to have posted good performance figures in its portfolios during the past five years.

Investment manager Tom Sparke attributes this to an active, conviction-led style. ‘We back our views heavily, but with an emphasis on reducing risk,’ he said. ‘Our balanced portfolio was capturing 85% of market upside and only 65% of the downside.’

In the past year, Gibbs Denley has moved towards a value-based approach in UK and European equities. ‘Europe looks good value because there is more political risk priced in,’ said Sparke. ‘It is an opportunity to buy some mispriced assets.’

The firm increased exposure to larger cap UK assets after Britain voted to exit the EU in June 2016. As Brexit made sterling weaker, large caps benefited from their trade in other countries. ‘There are opportunities in mid and small caps. But we are concerned about buying an exclusive small cap fund, because some companies in it might fall foul of that currency trade,’ said Sparke.

‘In the US, it’s the opposite. We are moving down the cap scale to take advantage of Donald Trump’s potential protectionist and deregulatory policies, which should help small companies.’

In October, Gibbs Denley started tilting its balanced portfolio towards high-yield bonds. ‘High yield looks favourable because default rates are low and falling; and we have mild global growth and limited but growing inflation,’ said Sparke.

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Phillip Rose, chief executive, Group IFA

Bolton-based Group IFA has £800 million under advice and its higher risk portfolios had a relatively heavy weighting in commodities, to capture recent increased returns in that sector. However, in December 2016 it reduced that weighting in favour of Japan, the Far East and some emerging markets.

Chief executive Phillip Rose said: ‘Japan is becoming a more developed equity market, with an income source that helps the investment. [Despite problems in China], we still expect better growth in the Far East than in commodities.’

Group IFA’s low-risk portfolios have a high percentage in cash, which the firm refers to as managed liquidity. ‘Two years ago, we halved gilt exposure when yields fell below 3%, then halved it again, when they dropped below 0.6% after the Brexit vote,’ said Rose. ‘We are looking to move back in at around 2%.’

The fixed interest part of portfolios moved more weighting to shorter-dated vehicles two-and-a-half years ago. Rose said: ‘That move affected performance negatively for around two years, but over the past three to five months it has been great. We have also had some infrastructure investment trusts that have performed well.’

Holding more cash dragged performance in the lower risk portfolios. However, Rose said the firm’s portfolios all significantly outperformed their Asset Risk Consultants’ equivalent benchmarks.

‘This has mainly been due to our higher exposure to infrastructure and index-linked bonds in lower risk portfolios,’ he said. ‘In higher risk portfolios, it has been due to weightings in global resources and infrastructure.’

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Jon Cobb, director, Trinity Wealth Management

Jon Cobb, director at St Albans-based Trinity Wealth Management, plans to change the fixed income part of his portfolios to take a more defensive stance.

‘Interest rates will go up,’ he said. ‘That will affect bond values. So simply holding [certain bonds] to maturity is not attractive.’

Cobb also made changes in anticipation of rising rates last year. But he said this year he needed to hone the approach further.

‘We wanted to act sooner rather than later,’ he said. ‘Last year, we replaced iShares Sterling Corporate Bond ETF with the Kames Absolute Return Bond fund and Loomis Sayles Strategic Income. We took on the Kames fund to dampen volatility, while the Loomis Sayles fund has a more global reach and is active.’

He said these changes worked out well. But, in hindsight, he thinks he took on more risk than necessary with Loomis Sayles. ‘It is too volatile now so we will reassess it,’ he said.

‘Another change made one year ago was to introduce Kames Property Income,’ he said. ‘We have a high regard for the house, the fund has a good blend, and it is a good alternative to the large property funds.’

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Austyn Smith, wealth management director, Austyn Smith Associates

London-based Austyn Smith Associates has increased diversification by doubling the number of funds in its in-house portfolios from 12 to 24.

Wealth management director Austyn Smith said this is due to heightened volatility in 2017. This is due to several factors, including the effect of US President Donald Trump’s policies and global reflation creating a potential stock market bubble.

The firm uses bespoke portfolios and its average client is 63 years old with £750,000 to invest. This means most clients want to preserve capital and are in the risk range of cautious to balanced.

‘We are tending towards higher cash allocations,’ said Smith. ‘The cautious portfolio has 20% in cash and the 5% in balanced is likely to increase soon.

‘Quantitative easing might have delayed the next market crash, but it’s nearly 10 years since the last big one, so there may be another one soon. You don’t want to be retiring [with a large, undiversified exposure to equities] as that begins. So we want to keep 12 to 18 months’ drawings in cash to avoid anyone having to dig into capital.’

Austyn Smith has made several changes in the past eight months. When the UK voted to exit the EU in June 2016, it reduced commercial property funds, which were starting to suspend, in favour of equities. As markets reached record highs, it started to move some exposure to absolute return funds.

‘I’m a fan of trends affected by demographics, so we have added small allocations to funds specialising in India, technology, digital communications and robotics,’ said Smith.

In fixed income, Austyn Smith has moved out of pure bond funds in the last 18 months due to the risk of rising interest rates. It has replaced these with blended equity and bond funds.

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Tony Clements, managing director, Lothbury Pendil Financial

In the past 18 months, London-based Lothbury Pendil Financial Services has reduced allocations to fixed interest and commercial property in its in-house portfolios. It replaced these with cash and short-duration bonds.

Managing director Tony Clements said it initially reduced property due to the risk of a Leave vote in the EU referendum. ‘However, we value the high yields generated, so did not remove our exposure completely,’ he said.

The fixed interest reduction was due to the risks of capital losses on bonds as yields started rising. ‘We increased allocations to short-duration corporate bonds because they have much less downside compared to traditional bonds and a better expected return than cash,’ said Clements. Lothbury Pendil has a new holding in the Threadneedle UK Sterling Short-Dated Corporate Bond fund.

The firm has also increased allocations to Henderson UK Absolute Return and Invesco Perpetual Global Targeted Return. It has additionally introduced Architas Diversified Real Assetsin the conservative and balanced portfolios.

Clements said this had reduced downside risk while still capturing market performance. ‘Using these funds increased our holdings with low correlations to traditional asset classes, but maintained beta through slightly increased equity exposure,’ he said.

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