Andrew Morgan, portfolio manager at Walker Cambria talks about backing value in UK equity.
'Our portfolios are called Alpha: r2, where alpha is the return above a benchmark and r2 the correlation to that benchmark. Given that our client base is almost exclusively made up of financial intermediaries, a relatively close adherence to the asset allocation of our benchmarks helps IFAs know what they are getting. Having profiled their client, the IFA can be confident that our portfolios will stay within the risk boundaries that the client has agreed to.
Our job can be distilled down to simply taking calculated risks with clients’ money, so it is incumbent on us to ensure we understand risk as thoroughly as we can. Our risk management process derives from our time working in institutional fund management and is central
to what we do.
We aim for risk to be deliberate, diversified and scaled appropriately. It is all too easy to take unintentional risks in a portfolio, or for a number of positions to be inadvertently correlated to one particular theme. We try to avoid these scenarios by stress-testing our portfolios through a variety of difficult environments, from the 9/11 attack to the collapse of Lehman Brothers. We pay particular attention to Value at Risk (VaR), as our principal concern is with downside protection.
Increasing value bias in UK
Within equities we are currently neutral on the UK, a position we have held for some time. Within the allocation, however, we have been increasing our bias towards value investments.
Although value as a style has historically suffered long periods of underperformance, we see the scale of value’s underperformance over the last three to four years as exceptional.
One of the funds through which we seek a greater value exposure is the Jupiter UK Special Situations fund.
We have been reducing our exposure to Europe, as we believe the strong economic growth seen in 2017 will be more muted this year. Our long-term view is that the structural flaws underpinning the eurozone remain, and a euro crisis will likely return at some point in the future.
Politically, the populist government in Italy could herald the unravelling of the single currency.
On the active side, our exposure to Europe has been via the BlackRock Continental European Income fund, which has a bias towards higher quality, northern European companies.
On the passive side, we like the Vanguard Developed Europe ex-UK fund.
Our balanced portfolio has 17% exposure to fixed income markets. With interest rates not far off their historic lows, and seemingly with only one direction to go, we are underweight bonds. Our position is predominantly in short duration bonds, given our expectation of further interest rate rises both here and in the United States.
Two of our favoured picks within the sector are the Artemis Strategic Bond and Royal London Short Duration High Yield funds.
We like long-term themes, and our balanced portfolio has a substantial exposure to alternative and thematic investments.
One example is the Goldman Sachs Global Small Cap fund, which leverages Big Data to find investment opportunities, and has sectoral exposure to the likes of information technology and AI.
Overall, our balanced portfolio has performed well since its inception in 2014. Key to this performance, however, continues to be our unrelenting focus on risk management.'