The abrupt turnaround in equity markets thanks to the US Federal Reserve’s policy change provides welcome uplift.
A healthy yield has helped keep our higher income portfolio in the black over the past four months, but some of our holdings have suffered capital losses. Tom Becket, who manages the portfolio, says: “We have seen a unique switch in the past few months, from abject pessimism to overflowing optimism. We endured one of the worst Decembers on record, followed by the best start to the year for global stockmarkets since 1991 and, in all honesty, not a huge amount has actually changed in the world to justify that switch.”
Constructing a resilient portfolio in such an environment has not been easy, and Becket admits he is feeling more cautious than usual. As a result, this portfolio is the financial equivalent of an ‘each-way bet’ at the races; it needs to provide protection in the event that volatility ramps up again, while also having exposure to any gains there are to be made if stockmarkets continue to rally.
Top of Becket’s mind at the moment is the US and the Federal Reserve. The Fed was hawkishly raising interest rates last year and repairing its balance sheet. Now that it has indicated there will be fewer rises in the US base rate in 2019, sentiment has improved.
However, Becket says: “I think people are believing in what they hope for rather than the reality of the situation. The fact is that recent data suggest things are quite tough. I think this will be a year of dull, although not disastrous, growth.”
There are no changes to the portfolio at this review – to do so at this point would be “pure speculation” – but Becket has a number of ideas for tinkering over the coming months, once there is more clarity on various issues.
He is likely to reduce his exposure to some of the bond proxies in the portfolio, for example, which have performed well as the pound has strengthened and stockmarkets have rallied. This includes holdings such as the Legg Mason Rare Global Infrastructure Income fund, which is by far and away the strongest performer within the group, up 10.1% since the last review. The tangible assets held by infrastructure funds makes them a perceived safe haven at times of uncertainty, and the fact that a Labour government looks less likely has helped sentiment around the sector too.
In place, Becket says he could be minded to increase his exposure to emerging markets, which he believes have been oversold by panicked investors. The region has performed well so far this year, but he expects this to continue. The Ashmore Emerging Market Total Return fund is up 4.1% since the last review in December 2018, and Schroder Asian Income Maximiser has gained 3.2%.
The latter would have made more impressive gains but it is hedged, so returns have been held back as the pound has ticked up against the dollar. Becket says: “Some people are nervous about China at the moment, but I have quite a strong expectation that its government will do what it can to get the economy moving.”
The Goldman Sachs Japan Equity Portfolio is down 2% since the last update, but this masks stronger performance in recent weeks. Ironically, the market was hurt at the back end of the year as investors flocked to the perceived safe haven of the yen in the volatility. The strengthened currency is bad for exporters; but it’s another area where Becket may look to increase exposure in the coming months.
More disappointing, he says, is the Artemis Global Income fund, which is down 2% since the last review and 11% since its introduction into the portfolio in August – the worst performer in the pack. Manager Jacob de Tusch-Lec was hurt by his exposure to cyclical sectors but says many of these, including US energy firm Hess and financial services company Synchrony, have subsequently bounced back. Becket says: “I would have expected the fund to have done better.”
He may also look to reduce exposure to fixed income assets, as these have been particularly strong in the first couple of months of 2019, making back all the losses of last year and more besides in many cases.
Our portfolio is producing a yield of 4.5% currently, which Becket admits is not easy. “Ten years ago, a 5% income was very easy to achieve. Today you either need to be very aggressive or really think outside the box,” he says. The two income maximiser funds are contributing a 7% yield to the group and three other holdings yield 6% or more, which allows for some lower-yielding growth plays in the portfolio, such as Japan and the US.
Overall performance of the portfolio has been fairly muted – it is up 1.7% in total return terms since inception, but down 0.7% over four months. But Becket is comfortable with progress. “This portfolio was a decent eachway bet for an uncertain environment, and I’m happy with that balance of being neutral with a hint of caution,” he says.
While he is unlikely to be ratcheting up risk any time soon, the coming weeks are likely to bring changes to the portfolio as we get a degree of clarity over issues such as Brexit and the trade war between the US and China. Becket adds: “It’s important to be open-minded as to what will happen next at the moment .”