Gavin Rankin, EMEA head of managed investments at Citi Private Bank, explains why US policy has turned them on to fixed income.
'Our first article discussed strategic asset allocation and the important role it plays in generating attractive risk-adjusted returns over the long-term. This second article will focus on tactical asset allocation and portfolio construction with highlights from current positions in the portfolio.
Our tactical positioning is based on recommendations from our global investment committee, a group of strategists spanning the globe who are charged with analysing macroeconomic conditions and providing views across asset classes over an intermediate time horizon. While the general timeframe for these calls is 12-18 months, the committee meets on a monthly basis to evaluate positions in light of current market conditions and are quick to adjust should their views or market dynamics change.
Recent tactical moves illustrate the nimbleness of the committee in responding to changing geopolitical events that could have a potentially significant and lasting impact on financial markets. Over the summer we meaningfully reduced our overweight to global equity and raised fixed income. This allocation shift was driven by US trade policy, which became less predictable and US tariffs and retaliatory measures forced world financial markets to become highly reactive.
Following up on the moves from the summer, in response to the current bout of risk aversion in global financial markets and potential further tightening of US monetary policy beyond market expectations, we continued to shift towards raising portfolio quality. We also increased diversification by decreasing global equity further and reallocating to shorter duration fixed income to take advantage of the growing opportunity created by higher US interest rates.
The highly adaptive and selective nature of our tactical positioning allows us to capture opportunities across asset classes and global markets in a timely manner, while mitigating risk across the portfolio.
Manager selection and portfolio construction
The final step in our process, which like the others is iterative and dynamic, is manager selection and pairing. This is where our multi-asset class portfolio management team and investment manager research join forces to select managers with certain characteristics and combine them in the portfolio in such a way to gain exposure to various styles, fundamental factors and segments within our benchmark while maximising the potential risk-adjusted alpha of the portfolio.
We tend to favour more concentrated managers with higher active share who have demonstrated the ability to outperform under adverse market conditions. When pairing managers, we seek complementary characteristics related to style or approach that would benefit in different market environments. This allows us to control for certain factors and accommodate a reasonable amount of tracking error at the manager level.
An example from the portfolio that highlights our distinct approach is the current US equity line-up, which contains three managers with different styles that could be categorised as growth, value, and defensive. While all three strategies are fundamentally-driven and primarily bottom-up, they each have unique approaches to investing that complement each other very well. Our growth manager is focused on high quality companies that consistently grow earnings, with an emphasis on valuation and clear visibility into earnings growth, whereas our value manager tends to seek companies that are undervalued due to low expectations in the market, but are expected to experience a catalyst that would be accretive to earnings in the foreseeable future.
Our third manager is much more defensive in nature, seeking companies that consistently return capital to investors by investing in dividend-paying stocks, thus maintaining a lower volatility profile relative to the other two.'