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Rathbones' Coombs piles into safe havens on UK recession fears

Citywire AA-rated multi-asset manager believes the chances of a hard Brexit plunging the UK into a recession are more than 50/50.

Rathbones' Coombs piles into safe havens on UK recession fears
 

David Coombs, the Citywire AA-rated manager of the Rathbone Multi Asset Strategic Growth fund, is safeguarding against the UK economy tumbling into a deep recession as the risk of a hard Brexit mounts.

The fund has 20% in cash – the highest in its nine-year history – and a growing proportion of ‘safe havens’ assets, such as Australian and US government bonds (7.5%) and gold (1.5%).

This month he increased his allocation to Australian government bonds by 1% and shielded another 10% of his equity portfolio from falling prices by adding to a 'put option' on the S&P 500, allowing him to sell the US index at a specified price at a later date. That now covers 40% of his equity portfolio, which has no exposure to the UK economy.

‘These safe havens are there in case we have a hard Brexit and markets start to discount a deep recession in the UK and high inflation,’ he said. ‘That is more likely than it was six months ago.’

He puts the likelihood of Britain falling into recession at 50% to 60%, up from 30% six months ago. He also rates the potential for a hard Brexit or second referendum at 50%.

‘I’m very negative on the UK,’ he said. ‘The current negotiating stance is unlikely to be successful either with the EU or [UK] Parliament. The Labour party is looking to unseat the government – there’s plenty of opportunity for political mischief.’

Some 14% of the fund is in UK-listed equities, but these are all international earners in the FTSE 100, like Unilever (ULVR), Shell (RDSb), Vodafone (VOD), Rentokil (RTO) and Ferguson (FERG).

He went into the EU referendum with no exposure to the domestic economy and bought back in the following week with around 5% of assets. He sold out again over the course of 2017 and exited the remaining domestic stock, Lloyds (LLOY), three months ago.

‘Brexit is a local skirmish,’ he said. ‘I’m taking Brexit out of the equation; what investors get with this fund is a “Brexit doesn’t matter” portfolio.’

Unlike a conventional fund

The £520 million fund’s lack of exposure to property and infrastructure also reflect his cautious stance. Coombs (pictured) would want to see a 10% correction in the Investment Property Databank index before he considered re-investing in commercial property.

Far from running a typical 60/40 equity/bond multi-asset proposition, he is also steering clear of fixed income, where he has just 2%, in special situations and legacy positions.

‘It’s looking very unlike a conventional medium-risk fund,’ he said. ‘The bond market needs a serious shake-out; I don’t see any value there.’

He believes equity markets are fair value and particularly likes the US stock market, having picked up another two companies – Amphenol (APH.N), a connectors and sensors business that stands to benefit from the internet of things, and US Bancorp (USB.N) – following a trip to the States in May.

‘We increased US exposure after Trump was elected,’ he said. ‘I thought in the short-term he would be good for corporate American and, in a funny way, he has,’ he said.

‘US companies are ahead of the game – embracing new technologies, facing off the Amazons on the world and focusing on customer value.’

Coombs owns Amazon (AMZN.O) and Google’s parent Alphabet (GOOGL.O); in gaming, he holds Call of Duty developer Activision Blizzard (ATVI.O) and FIFA football game developer Electronic Arts (EA.O); and in financials First Republic Bank (FRC.N) and Northern Trust (NTRS.O).

Chances of a correction

The fund seeks to achieve total returns of 3% to 5% above the consumer price index measure of inflation over a minimum five-year period, and a targeted risk budget of two-thirds of the volatility of global equities as measured by the MSCI World equity index.

‘I build the portfolio from the bottom up – so how much risk do I want to take?’ said Coombs. He can use his risk budget by investing in equities or other asset classes that correlate highly to the stock market – so high yield bonds, emerging market debt and commodities.

At present, he is neutral on equities with an allocation of 65.8% in his ‘equity risk’ bucket, including 59.7% in equities. ‘I don’t see much value for anything outside equities,’ he said. ‘Equity markets aren’t really cheap – there aren’t many bargains out there, at least not in the assets I want to buy – but they also aren’t really expensive.’

He is, however, bracing himself for a ‘liquidity event of some sort’ over the next few months. ‘The chances of a correction are quite high,’ he said. ‘That’s how we’re positioning, but I’m relatively optimistic on the valuations of equity markets; it’s just that sentiment could be pretty low for a while. If we’re right, we’ll be buying [equities] into the dip.’

Around 39% of overseas exposure is currently unhedged – a deliberate move to benefit from weakness in sterling.

‘Bearing in mind that I’m running a sterling multi-asset fund, currency volatility is a big issue; I’m running a lot of foreign currency risk to offset Brexit risk, [Jeremy] Corbyn risk and government failure risk,’ he said.

Some 40% of his US government bond exposure is hedged, while his Australian government bond exposure is wholly hedged back to sterling.

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