Jonathan Webster-Smith, director & head of multi-asset team at Brooks Macdonald discusses protecting capital during the downturns.
Overall, the current environment of strengthening global growth, subdued inflationary pressures, benign interest rate outlooks and low volatility looks set to continue for the next few months.
We remain constructive on equities as the corporate earnings picture remains strong, despite the fact that valuations are currently at the higher end of their past-decade range. This is particularly the case relative to bonds, as equities’ earnings yields remain well above those of the equivalent sovereign bonds.
Nevertheless, the recent pick up in volatility has highlighted the need to ensure balance within investment portfolios.
We have held this view for some time and have diversified to avoid being overly concentrated towards particular risks. This has been achieved by adding exposure to certain equity themes, such as technology, healthcare and financials.
We have also added exposure to non-equity asset classes, such as alternatives, which has allowed us to improve the defensiveness of our portfolios without becoming overly exposed to the risks
that higher interest rates present to fixed income markets.
These decisions have paid dividends for us in recent months and we expect our medium risk strategy to be around 2% ahead of its benchmark in the first quarter of 2018.
While the absolute numbers are negative, it is important that our decisions to diversify and reduce risk outside of equity exposure have paid off. By protecting capital in the downturns, investors gains significant compounding effects when markets rise.
Given our views, it should not come as a surprise that we have used the recent falls we have seen to increase our exposure towards equities, in particular within technology and Europe.
As I mentioned last time, we sold down some of our UK exposure, favouring international equities, and have not changed this view even with the UK market falls we have seen. Our exposure is based around multi cap funds to ensure that we can take advantage of areas that are under researched, such as Japanese smaller companies. Looking at last year, our global small cap fund contributed just under 1% of the return, so the additional risk we have taken by investing down the market cap
has paid off.
I also wanted to highlight our Asia exposure, which has added value in the recent downturn. This comes after it was one of the best performing funds in our portfolios for 2017, benefiting from the technology success that dominated the market last year.
Overall, fund selection was most beneficial to returns over the last year and during the recent downturn. We will continue to seek to maintain diversified portfolios, ensuring that we do not expose our investors to any single particular risk.