Najib El-Rayyes, portfolio manager at Rivers Capital poses the question; Is it time to position for the close of the bull run?
'It cannot have escaped anyone’s attention that the UK is on the brink of a historical political juncture.
Despite two years of wrangling, propaganda and parliamentary machinations we find ourselves no closer to a solution. As events have unfolded we have been plunged deeper into a state of uncertainty, and it is this uncertainty that provides investment managers like us with something of a conundrum. Whether we are thinking about Brexit, monetary policy or indeed any other situation in which the outcome is unclear, we are compelled to take certain steps to mitigate the impact of those factors on our portfolios.
Time for a rebalance
The strong recovery in the first two months of this year has taken valuations and market levels back to where they were when we last felt they were approaching extended levels. This led us to rebalance our portfolios at the end of February in order to reduce exposure to some riskier higher beta assets.
The challenge is to decide the best route to protect the portfolios against the outcome of those binary events without adversely impacting performance in the short to medium term.
Our valuation driven asset allocation model has prompted us to decrease our exposure to what we call ‘enhancers’. This was mainly in the form of actively managed developed market equities with the bulk of the changes in European, Japanese and US equities. We reallocated the majority of this capital into ‘anchors’ and ‘diversifiers’.
Within anchors, we have added Vanguard’s Inflation Linked Gilt fund, the Absolute Return Bond fund from Kames (managed by Colin Finlayson, pictured) and Merian’s Absolute Return Global Equity fund. It is always difficult to find assets which are truly uncorrelated to both anchors and enhancers and we probably spend the majority of our time looking for potential candidates for our diversifiers bucket.
This month we have added a new holding in Foresight’s UK Infrastructure fund and maintained our position in the iShares Global Property Securities fund. Although some of the changes above look defensive, we are still relatively constructive on the market in the short term and within enhancers have added some global equity exposure through the Allianz Best Styles Global Equity fund and some emerging markets exposure via Baillie Gifford’s Emerging Markets Growth fund.
Every bull market comes to an end
Despite the steep market sell-off in December, the S&P 500 and Dow Jones indices have just celebrated 10 years of the longest bull market in history, managing to avoid falling more than 20% during that time which would officially have tipped them into bear market territory. While it would be foolhardy to attempt to predict when this will finally happen, the fact that throughout history the average bull market has lasted an average of 4.5 years means that we feel some caution is warranted.
At Rivers we do not pretend we have the foresight to predict the exact tipping point or indeed any market inflection point, but if assets are relatively expensive we do think overall portfolio risk should be reduced. Although earnings have continued to be relatively strong there are a few early signs of a slowdown which consequently affects our valuation expectations.
In my last article I said that unloved value funds would become a more important part of our strategy and despite the recent rally being driven by the same equity growth funds I still think that will be the case this year and next.
Selecting managers whose approach is based on being more prudent when allocating capital will reap rewards in more uncertain markets.'