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MPS Investment Committee: James Horniman, James Hambro & Partners

MPS Investment Committee: James Horniman, James Hambro & Partners

Portfolio manager at James Hambro & Partners, James Horniman explains why caution pays as volatility makes a comeback.

'The resurgence of volatility is the story of the year so far and the big challenge for portfolio managers is deciding how best to respond to it. 

Equity markets surged in January with the S&P 500 US Equity index seeing a stock market return more commonly seen over the course of a year compressed into one month, up 7.5% on the back of inflows into equity markets of $100 billion (£8.1 billion).

The beginning of February saw us head into correction territory (loosely defined as a 10% decline) as inflation fears took hold, prompting renewed fears that the central banks would hike interest rates. The volatility was heightened by systematic and algorithmic trading strategies that are often leveraged and driven purely by technical signals unwinding their positions. 

Asset allocation

We were not specifically predicting the early February volatility but, ahead of it, we had already raised cash levels and were underweight in equities and fixed interest. Though cautiously optimistic generally, we were conscious of the fact that markets cannot go in one direction perpetually.

We have since decided to take further risk from the models by reducing our exposure to longer-duration assets that we think will fare poorly in a rate rising atmosphere.

In the models

We have been increasing our exposure to the JOHCM UK Equity Income fund. If markets can look through the increase in volatility, we feel this fund is well positioned to partake in the late-cycle rotation to value already witnessed this year.

BH Global has also been a position we have added. The strategy engages in active trading of currencies, debt securities, and collective investment schemes – anywhere it can create value. The fund has a low correlation to the broader equity market – potentially attractive in a volatile environment.

In the US, which typically represents around 25% of the equity part of our portfolios, we retain our holding in the S&P 500 ETF. This may surprise people who know us as active managers with close to half our equity portfolios typically in direct stocks. It is a cost-effective way to have broad and diversified US exposure in a market where funds struggle to outperform.

We still supplement this with a small portfolio of individual stocks that we think will best weather any storms and offer the greatest opportunity for delivering strong, steady yields and long-term growth.

Outlook

The global economy remains healthy and supportive of conditions for corporates which could see the bull-run continue and valuations move in lockstep with corporate earnings. This makes any short-term correction a possible buying opportunity.

It is not in our thinking but markets could also grind to a halt – or worse – as participants refuse to continue climbing the ‘wall of worry’ presented by stretched valuations.

In the circumstances, our underweight position to risk assets feels appropriate. The proceeds from recent sales will be retained in cash while we wait for stronger indications of which way the market is heading. 

Performance

During 2017, the JH&P Balanced Model returned 13.65% relative to the ARC Steady Growth index returning 9.40%. Since inception (31 October 2016) to 31 December 2017, the JH&P Balanced Model has returned 15.0% relative to the ARC Steady Growth index returning 10.7%,

The size of the MPS across of our all strategies, including the JH&P Balanced Model, is currently £158 million.'

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