Raising cash by selling US equities is the most recent asset allocation move for the Brewin Dolphin Balanced Portfolio, said Ben Gutteridge, head of fund research. ‘That leaves us still overweight US equities and equities in general,’ he added. ‘But we’ve gone from underweight cash to neutral cash.’
Gutteridge highlighted the ‘valuation richness’ of US equities in price-to-earnings terms, relative to other markets. But he said: ‘It merits a premium, given the quality of its businesses. Its banking sector is in better shape; it has global innovators in healthcare and biotech; and technology plays a big part in its equity markets.’
The main US funds held in the portfolio include the Baillie Gifford American fund, which Gutteridge describes as ‘our growth strategy’. There is also the JP Morgan US Equity Income fund, which has ‘a complementary value approach’. The third and final US equity holding is the passive Vanguard US Equity Index fund.
The portfolio’s recent reduction in US equity allocation is driven by Gutteridge’s view that the economic cycle is in its late stages. ‘That’s associated with more volatility, because there’s low unemployment. It means inflationary pressures are building.’
He pointed out this means the US Federal Reserve (Fed) can no longer offer an ‘insurance policy’ for equity markets. ‘Since the financial crisis, market anxieties have been met with a dovish response from Fed, as there was no inflation,’ said Gutteridge.
Despite the recent equity reduction, the head of fund research said the allocation to equities has risen in the past 12 months, particularly in emerging markets, Asia and Europe. And the portfolio has added to the Fidelity Emerging Markets and Threadneedle European Select funds.
‘Chinese stabilisation and a better global growth environment supports emerging markets and Asian assets,’ explained Gutteridge. ‘And Europe was a valuation trade before the French election. There was too much pessimism.’
Indeed, the Balanced Portfolio is overweight equities. ‘We think recessionary risks are low, certainly in the immediate future,’ said Gutteridge. ‘And that typically favours equities.’
However, he said this overweight position had been trimmed recently because ‘there could be better entry points that present themselves through rising volatility. But you can’t get too cute with timing on these things.’
Meanwhile, the portfolio is underweight bonds. Gutteridge said this is on valuation grounds, relative to the growth and inflation outlook in general, which is a difficult environment for the asset class. ‘But we’re not expecting a bloodbath,’ he added.
Gutteridge said a big concern for bonds is China, which is modestly tightening monetary policy. But he added there are also worries over a possible ‘growth wobble’ in China, as well as ‘trade skirmishes’.
‘These types of damaging events for global growth would be good news for bonds,’ Gutteridge said. ‘So we’re only modestly underweight bonds.’ The portfolio holds Robeco Global Credits, which he describes as a ‘high-quality investment grade fund’, and the passive Vanguard US Government Bond Index, hedged to sterling.
He added government bonds and high-quality credit are held ‘as a hedge against growth shocks’. But Balanced Managed holds no sub-investment grade bond funds, ‘although some funds will have a sprinkling of high yield where appropriate’.
Gutteridge said high-yield bonds do not form part of the WMA Balanced benchmark. ‘We have concerns over liquidity with high yield. Valuations are a bit rich,’ he pointed out.
Brewin Dolphin retains a positive market outlook. ‘It comes back to the strength of labour markets. There is confidence in the business sector globally, particularly in the US,’ Gutteridge said. ‘We’re relatively confident too. But these things aren’t a slam dunk, hence our balanced portfolio.’