Michael Ast (pictured), investment manager at Holden & Partners explains why they avoid ‘frenetic’ calls while sticking with EM.
'At Holden & Partners, our investment committee focuses on the longer-term when it comes to investing our clients’ assets. This approach enables us to avoid frenetic asset allocation shifts which are often based on short term movements or ‘noise’ as opposed to truly material changes in fundamentals which would trigger a re-evaluation of our portfolio positioning.
On the more granular fund selection level, we leverage our specialisation in ethical, sustainable and thematic investing both to enhance returns and to avoid the pitfalls that can beset companies which exhibit poor ESG characteristics.
Within our current asset allocation, we maintain underweight positions to fixed income – in particular the investment grade and developed sovereign genre given the poor returns offered by these asset classes coupled with what is likely to be a continued – albeit gradual – rising global interest rate environment.
We currently employ a number of fixed income managers with flexible (strategic) mandates which enable them to manoeuvre across various levels of credit quality, duration and regions based upon the underlying market backdrop and outlook. Overweights to absolute return strategies and infrastructure have been key recipients of this low tactical and strategic exposure to bonds.
We remain neutral on developed market equities at present. This neutral stance includes UK equities across the market cap spectrum. We are of the view that UK stocks remain downtrodden relative to various comparable developed market peers primarily due to concerns surrounding Brexit.
Under a negative EU departure scenario, more globally-oriented FTSE 100 firms may be sheltered from the resultant malaise to an extent due to their historically inverse relationship to sterling. Conversely, it could be said that small and mid-cap UK companies are more vulnerable to a ‘no deal’ scenario than their larger counterparts due to their predominantly domestic revenue streams and greater reliance on imported inputs.
There is truth to that thesis, however a decline in sterling could also serve to attract foreign investment and trigger an increase in M&A activity as foreign buyers are drawn to UK assets due to the cost savings provided by a weaker pound. Should the negotiations result in a more positive outcome, we believe UK equities could undergo a relief rally of sorts, with particularly amplified gains perhaps coming from the small to mid cap space.
Sticking with emerging markets
We remain overweight emerging market equities, as we view this area as currently offering significant value to longer term investors. The marked outperformance of developed market stock indices over their EM counterparts over the past seven years has not gone unnoticed, and we have positioned ourselves accordingly should a reversionary pattern of returns occur.
We are also aware of the divergence of returns with EM equities themselves over the aforementioned period – with quality and growth stocks providing vastly superior returns to those of value stocks. With this in mind, we do carry a pronounced weighting to value within our blend of EM equity funds at present – with allocations to quality, income and growth managers also in place as we cannot be certain of timing when it comes to factor rotation.
In our view, the bouts of market turbulence which we have undergone in 2018 were to be expected coming into the year. 2017 may have done wonders for many fund managers’ Sharpe ratios, though it did decidedly -little for ‘late-to-the-game’ investors who seemed to forget that equities are an inherently risky asset class and that markets do not go up in straight lines. We believe that applying degrees of both patience and prudence within one’s asset allocation and fund selection are critical when it comes to achieving strong risk-adjusted returns over the longer term.'