Will Dickson, head of portfolios at P1 Investment Management tells us why they have gone underweight in equities.

'The investment process that we have built at P1 Investment Management is centred around the knowledge that cost plays an important role in investment returns. We believe that some asset classes lend themselves to active management while others do not.

Our analysis of the historical and theoretical evidence of active management informs our strategic asset allocation, steering our portfolios towards areas where the best net returns can be achieved. We only use active managers in asset classes where we believe the returns, on a risk-adjusted basis and after fees, will be more attractive than their passive alternatives.

We then overlay our tactical asset allocation decisions. These are informed by our views on relative and absolute asset valuations as well as the perceived risks and market sentiment. We typically take contrarian positions in asset classes with valuation advantages. Our tactical asset allocation and fund selection decisions look to take advantage of multi-year trends and opportunities and we would expect a minimum of a two-year holding period.

Asset allocation decisions

The most recent portfolio changes were made at the beginning of July. This saw the unwinding of an overweight position we had in equities and movement to a small underweight.

The position had been taken at the start of April following the sharp equity market sell-off during Q1. Our assessment was that

on an absolute basis and relative to other asset classes, equities were particularly attractive. Furthermore, we believed that market worries over a potential trade war between the US and China and monetary tightening were overplayed. Nevertheless, the subsequent rally in the equity market exceeded our expectations. However, by July, not only had equities recovered their lost ground, but the risks had developed more significantly than we believed they would three months earlier. Our outlook, as a result, reversed.

Within equities we looked to exploit valuation disparities across different geographies. Our most active calls have been to maintain significant exposures to Asia ex-Japan and emerging markets with a corresponding underweight to US equities. These exposures have primarily been achieved through additions to our core portfolio holdings, including the Schroder Asian Alpha Plus and Fidelity Emerging Markets funds, managed by Nick Price (pictured), which we have held for many years.

The current low yields available in fixed income has led us to look to alternatives as a way of diversifying the portfolio away from equities. We are particularly looking for investments that have the potential to provide positive returns during all market conditions and are lowly correlated with both equities and bonds. An example of this and a recent addition to the portfolios has been the JPM Global Macro Opportunities fund.

Key positions

We have a long-term strategic overweight to UK and European equities as our research has indicated active managers have the best opportunities for outperformance. We use the Jupiter European and Liontrust Special Situations funds, among others, to exploit this. Europe, in particular, has a strong record of managers being able to add value over the market well in excess of any fee charged.

While active calls are made, we will always maintain a diversified portfolio of bonds, equities, property and alternatives.

Asset allocation calls and the use of active managers are utilised to generate incremental gains over the returns of the market, enabling clients to enjoy the benefits of compounding.  To ensure risks are controlled, we have also implemented proprietary stress-testing of our portfolios to better understand the risks present. We want to confirm that we are aware of the potential drawdowns that may be experienced and illustrate these to clients, arming them with the resilience to weather more demanding market conditions.'