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MPS Investment Committee: Philip Bagshaw, City Asset Management

MPS Investment Committee: Philip Bagshaw, City Asset Management

Philip Bagshaw, senior portfolio specialist at City Asset Management explains why in rough seas they look to the horizon...and the Fed

'Following the high levels of volatility we saw in December and, unusually, through the Christmas period, markets have moved to a period of relative calm. That allows us to at least pause for breath and think about where we might be going next and how we might want to position for it.

In times such as these, it is tempting to make lots of changes. Despite this, our asset allocation has actually remained stable through the last quarter of the year.

So much has been going on, but the one thing that we are paying attention to above all else has been the behaviour of the US Federal Reserve. This is the first market sell-off since J. Powell became the chairman, and how he and the Fed respond is one of the most important factors that investors should be looking at right now.

Since he began his role, Powell has been clear that he wants to make a break from his predecessors in terms of the ‘Fed put’.

However, in December, the rhetoric around monetary policy changed significantly and softened. It’s possible that this is related to pressure from US President Donald Trump, but the real question is whether this is a change in course or whether the previous messages are to be believed.

This leads back to why we have made so few changes and believe our initial positioning is still fit for the current environment.

There is a belief that markets can climb back to previous highs if economic data improves. However, it is the circular loop of more positive data or markets followed by more hawkish central banks that make us believe new highs are unlikely. It is for this reason we have chosen to keep a relatively cautious asset allocation.

In order to reflect this outlook, we have chosen to use more alternative assets, and we have been careful in fixed income to use funds that are not so dependent on risky assets performing well.

Within our lower risk portfolios, for example, we have been using the Allianz Strategic Bond fund, which is run by Mike Ridell.

This fund has a very different approach to others in its strategic bond peer group. The main driver of risk in other funds is credit and, in particular, high yield credit. The fund takes a more diversified approach, focusing on the global investment grade bond universe and providing diversification to equities, something it has achieved effectively in the recent risk off quarter, to the benefit of our portfolios.

An example of a balanced mandate is our Real3 portfolio, which we expect to have a volatility of about half that of global equities over time. Performance of our Real3 mandate over 2018 was just ahead of -3.0%, which is disappointing when compared with the target of CPI+3%, but it has to be considered against the backdrop of difficult equity markets.

We aim to reach our targets over a five-year time horizon and remain confident we can do this, despite the difficulties in markets today.'

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