To make portfolios more defensive, Fairstone’s investment team has diversified away from traditional bonds and equities into alternatives.
‘Based on current data, we believe the business cycle is moving towards a cyclical peak. So some reduction in risk asset exposures is appropriate,’ said head of research Oliver Stone. And, given what Stone describes as ‘the elevated nature of most markets’, the team is considering cutting equity allocations this quarter.
London-based Fairstone oversees £8.1 billion of client assets, with £5 billion of this under management. The investment management arm administers a range of managed portfolios, which have £350 million under management.
The firm’s investment process involves identifying relative valuation opportunities between asset classes. It uses quantitative models that examine market valuation and macroeconomics, as well as qualitative analysis of asset class drivers, such as geopolitics.
‘We then try to identify differentiated, preferably “underowned”, managers who are able to express their investment views in an unconstrained way,’ Stone said.
The team’s analysis shows government bonds and conventional corporate debt currently offer little value in absolute terms and carry duration and liquidity risk. So Fairstone is underweight fixed income.
‘We’re still happy to hold a select few strategic bond funds with flexible mandates, primarily for income generation. But, in general, we believe our alternatives managers can provide a steady return stream uncorrelated to bonds,’ Stone said. The team is currently overweight alternatives, which largely comprise absolute return managers.
Meanwhile, in the equity space, the team uses directional long/short funds to mitigate some of the risk associated with their long-only investments. Stone says this is important at a time when valuations look elevated in historical terms.
Japanese equities is another overweight position. In Fairstone’s view, this market offers value from a fundamental and technical perspective.
The investment team meets once a week to discuss asset allocation and fund selection. Managers review portfolio positioning on an ongoing basis. Asset allocation and investment committees also meet each quarter to formally review positioning and performance.
Stone highlighted alternatives as a key performance driver in the past one and three years. They provide returns with less volatility and maximum drawdown than conventional assets.
‘Given rising levels of cross-asset class volatility, we view this risk reduction trait as particularly important,’ he said.
Data to: 29 March 2018
*Other includes alternative investment strategies/undisclosed/others.
**Excludes platform charges and adviser fees. Includes charges on constituent funds.