My asset Allocation

When creating any portfolio, the initial starting position has to be the objectives to be met. Being offered a completely open mandate with which to write this column, therefore, the most difficult decision was to determine the objectives of the fictional portfolio.

I eventually settled on the type of portfolio most readers will be faced with constructing: the “balanced” mandate. Essentially made up of three parts – UK equities, international equities and fixed income exposure – I have sought to produce a portfolio that offers investors a combination of growth and income with a reasonable level of risk.

While I shall attempt to add value via some tactical asset allocation decisions, the force driving the performance of the portfolio should be the selection of funds that consistently generate good performance.

To help me, I have called on the resources we have available at Brown Shipley (manager of the range of Solus funds) to identify those funds that have the ability to generate consistent performance. We have developed a proprietary system of screening funds for consistency.

Having identified these funds, we seek to understand the processes involved in generating such returns in order that we can answer the million dollar question: will these funds continue to deliver?

But identifying good funds can get you only so far. Portfolio construction is key. The purpose of a fund of funds manager should be to remove the risk that a single portfolio manager adversely affects a client’s wealth. A blending of styles, philosophies and processes ought to ensure that the development of particular trends or fashions do not leave the portfolio vulnerable.

And so I have aimed not to select what may be the top-performing fund(s) in each sector based on my view on markets, but to create a blend that will deliver the goods almost regardless of what happens in the future. The less of me you see in the portfolio, the better.

However, there are some views I hold so firmly that it would be improper not to ensure they are represented.

Global fixed income markets are overvalued. I do not agree the interest-rate cycle has peaked or is near peaking. Monetary policy remains overly accommodative and is inconsistent with the supposed goal of price stability. The New Star Sterling Bond fund, run by Phil Roantree, has taken a defensive approach to the interest-rate cycle via the use of floating-rate notes and shorter-dated bonds.

Japanese equity markets appear good value. Signs that the unloved Japanese economy has established a self-sustaining path to growth via a recovery in domestic demand mean that combined with the currency gains that I would expect to see in the coming years, the Japanese equity market looks attractive. Schroders has an excellent stable of Japanese funds, headed by Andrew Rose in Tokyo. With a strong team and robust processes, the Schroder Tokyo fund appears an obvious choice.

While emerging markets may not be for everyone, it would be foolhardy to ignore them. As many territories enjoy their own industrial revolution – despite the signs that such areas will inevitably show signs of a slowdown in growth – valuations are compelling and the long-term view is that exposures will increase over time.

Philip Ehrmann’s Gartmore Emerging Markets fund has a superbly well-constructed investment process that meets all our requirements for third-party managers, and is an ideal vehicle for access to these markets.