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MPS Investment Committee: Jason Day & Eric Louw, Standard Life Wealth

MPS Investment Committee: Jason Day & Eric Louw, Standard Life Wealth

Jason Day (pictured left) & Eric Louw (pictured right) senior investment managers at Standard Life Wealth discuss SLW turning its back on lacklustre UK for EM exposure.

'At Standard Life Wealth, we manage over £1 billion across a variety of platforms through our managed portfolio service (MPS). We offer target return, our low volatility absolute return proposition, and conventional MPS, five multi-asset, risk-targeted portfolios, with a total of 10 MPS models available.

Both the target return and conventional MPS models have increased exposure to emerging markets this year. Although the implementation between the two solutions has been different, to an extent both offerings used UK equities as a source of funding due to the ongoing challenges facing the UK economy versus its developing peers. 

Synchronised global growth, strong cyclical momentum and an uptick in domestic consumption have all helped to support EM. Indeed, the International Monetary Fund recently upgraded its growth forecast for the asset class to 4.9% for 2018, up from 4.6% last year. 

Given this supportive backdrop, we have tactically been adding to EM equities in the conventional MPS portfolios for an overweight position.

In sharp contrast, the economic backdrop for the UK has been deteriorating, which led us at the start of the year to tactically reduce the weighting to our basket of UK equity funds from a neutral stance to an underweight in conventional MPS. UK domestic demand remains lacklustre, real income growth subdued and we have the overhang of brittle investment spending as the country feels its way through the Brexit negotiations.

The target return portfolios have return objectives in excess of cash benchmarks and as such do not have a traditional asset allocation; rather, these are highly diversified across 30 different strategies. The models do not currently hold any dedicated EM equity or Asian funds; instead we express our views in a more nuanced manner. 

Last year we increased our positive exposure to EM, initially making a foray into EM debt, then taking a position in Kospi futures later in the year, as we believed that Korean equities were cheap and had scope to re-rate. 

Our debt exposure is achieved by blending the complementary strategies of the Neuberger Berman Emerging Market Debt Local Currency fund and the SLI Emerging Markets Local Currency Debt funds.

The recent bout of US dollar strength, coupled with higher US Treasury yields this year, has seen EM debt give back some of the strong performance it had captured over 2017, so we have used the recent weakness to add to our positions. The asset class continues to offer both compelling absolute and relative valuations, with EM local currency sovereign bonds offering a yield to maturity of some 6.29%, which we feel is attractive in a low yield, low return environment. 

Within target return we often select one equity market or sector against another in relative value strategies. Our EM vs Brazilian equity strategy was complemented in the first quarter of this year with the EM vs UK equity strategy, reflecting our positive view on developing markets despite the international earnings dimension of the UK market.

We have had an allocation to UK equity since the portfolios were launched.  We hold a blend of funds, for example, the Artemis Income fund has been held since launch and the JP Morgan UK Equity Core fund since 2014. We use offsetting hedges to dynamically adjust the level of market exposure. With the negative economic backdrop and Brexit uncertainty, we prefer to take our equity exposure internationally and our UK equity exposure is therefore currently fully hedged.'

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