Increasing exposure to emerging markets and absolute return funds are key themes of the year for Marcel Porcheron, head of managed funds at Tilney.
The firm largely has a long-term buy-and-hold approach. It has made weightings tweaks rather than wholesale asset allocation changes.
Tilney’s Income & Growth model portfolio (see chart and table, below), a balanced mandate, aims to deliver an annualised return of consumer price inflation plus 2%. And there is a focus on downside protection.
‘The risk for us is the permanent destruction of our clients’ capital,’ Porcheron said. ‘And we aim to manage the volatility of our portfolios over 12-month periods.’
The fund is not constrained by benchmark or geography. It is run using a diverse multi-asset approach. ‘We don’t think about positions being overweight or underweight,’ Pocheron said. ‘Our asset allocation is more about how we achieve our goals. The starting point is how to get that return target with the least risky portfolio.’
The team is reasonably upbeat on global economic growth. Last year it moved to around neutral weight on equities, with 49% exposure. Tilney chief investment strategist Ben Seager-Scott says, in the rally prior to 2016, they were wary of stock market returns driven by an ‘unsustainable rerating’.
‘Since then, we have become more constructive,’ he said. ‘We moved to a more neutral position, and then to a marginally positive stance.’
He added the earnings outlook continues to look above-trend. But he said the team’s enthusiasm has been tempered by valuations that look ‘fair-to-expensive’ on many equity markets.
Porcheron said, given high valuations and an uptick in volatility, he favours active managers with a proven track record. UK equities comprise 20.9% of the portfolio. Core holdings here are the Lindsell Train UK Equity fund (managed by Citywire AAA-rated Nick Train) and the Evenlode Income fund (managed by AA-rated duo Hugh Yarrow and Ben Peters).
In Europe, Tilney holds the Jupiter European fund, managed by AA-rated Alexander Darwall. ‘It’s a concentrated and totally unconstrained fund invested in his best ideas,’ he said. ‘Darwall looks for quality companies that can grow almost regardless of the economic environment.’
Since the turn of the year, the team has gradually upped emerging market exposure at the expense of developed markets, both across equities and fixed income.
These positions together comprise just over 6% of the portfolio. The top holdings are the Fidelity Emerging Markets fund for equities, and the Ashmore Emerging Markets Local Currency Bond fund in credit.
In fixed income, the portfolio is short duration in fixed income and has a weighting of just 16.5%, significantly lower than its historic average. As such, it is positioned for a rising yield environment.
‘We remain concerned over core fixed income, especially UK gilts,’ Seager-Scott said. ‘These appear very unattractive in anything other than a deflationary doomsday scenario.’
Regarding interest rate risk, Porcheron has picked managers aligned to Tilney’s objectives of being unconstrained, active and not taking too much risk. In investment grade bonds, he holds the TwentyFour Absolute Return Credit fund.
Caution around fixed income has prompted Tilney to increase exposure to absolute return funds. They now comprise around 21% of the firm’s balanced-type mandates.
The firm holds long/short equity and multi-asset funds. He holds the Invesco Perpetual Global Targeted Returns, BlackRock UK Absolute Alpha and Threadneedle UK Absolute Alpha funds. ‘Some strategies are less accessible in an MPS-type portfolio, as they need to be on platforms,’ Porcheron said.