Paul Williams, director of research at Blankstone Sington tells us how their cautious portfolio held onto capital in a turbulent year.
'We run an asset allocation system, developed in-house, called Market Pulse. Currently, it has our four MPS portfolios slightly overweight equities. This, I feel, is a reflection of equity markets being generally somewhat oversold in the short term (Market Pulse is designed to be contrarian – for example, to increase equity exposure following falls in equity markets). Markets in general have suffered due to recent trade disputes, and UK equities in particular due to Brexit concerns. As we believe the pessimism to be overdone, we are comfortable with the stance dictated to us by our model.
Our Cautious MPS portfolio has a target asset allocation of 35% fixed income, 37.5% equity, 25% alternatives and 2.5% cash. The entirety of this exposure is taken through collective funds with no direct holding of equities or bonds. The equity exposure includes two property real estate investment trusts (Reits): Custodian Reit, which invests in regional commercial properties, and Civitas Social Housing Reit, which invests in existing portfolios of built social homes in England and Wales. These assets tend to have low or negative correlation with equity markets, which helps diversity within the equity portion of the portfolio and the portfolio as a whole.
We have 10 funds covering our fixed income allocation, including investment grade corporate bonds, strategic bond funds and global bond funds, and a couple of property and infrastructure debt funds to aid diversification. One of these debt funds is ICG Longbow Senior Secured UK Property Debt Investments Limited. It has a portfolio of loans secured against various commercial properties, such as distribution centres, retail outlooks, industrial units, offices and hotels. The beauty of an investment like this is that the net asset value is not volatile, so the capital value of the investment has remained reasonably stable, while the investment provides a good income.
Income is not an aim for our Cautious portfolio, but because of the fixed income allocation, the portfolio does provide a yield.
In the alternative space, the portfolio holds six varied funds investing in structured products, gold, solar energy, asset finance and two funds that have a multi-strategy approach, one of which is the Natixis H20 MultiReturns fund. The fund is an actively managed absolute return fund which invests across fixed income, equity and currency markets on a global basis. It has produced a positive return this year, unlike many others in its peer group.
Overall, our Cautious portfolio has been pretty much flat this year, so clients invested in it have at this point protected their capital. This is in a difficult year, where less than 10% of asset classes have had a positive return.
We expect positive returns from this portfolio again once equity markets in particular start to recover.
Looking at the rest of the year and into 2019, and second-guessing our Market Pulse, I do not anticipate any further increase in our equity exposure within the MPS portfolios unless there is another substantial market sell-off.
We believe equity markets may recover through the year’s end – in which case, we hope to benefit from our slightly overweight equity exposure, particularly in our Growth portfolio, where we have built up an overweight position in emerging markets.
One of our holdings is the RWC Global Emerging Markets fund. What we like about this fund is that it includes some exposure to frontier markets. It also tends to outperform when markets are rising – we expect emerging markets to outperform over the next 12 months.'