Panellists react to the market volatility by, among other tactics, reducing commercial property exposure and increasing weighting in fixed interest. Changes of direction are not on the agenda.
Advisers look set to inject more caution into their portfolios as fears of an American recession threaten further suffering on equity markets.
Figures from Financial Express show that volatility rose sharply across selected Adviser Fund Index (AFI) indices, Investment Management Association (IMA) sectors and Association of Private Client Investment Managers and Stockbrokers (Apcims) indices in the fourth quarter of last year. Investors reacted by switching allegiance from the Specialist sector to Cautious Managed, which according to the IMA became the most popular sector for sales in November and December.
AFI panellists, however, do not envisage a complete change of direction. Their plans vary from reducing commercial property and Japanese exposure to increasing portfolio weightings in fixed interest.
Anna Bowes, savings and investment manager at AWD Chase de Vere, says the only change she is likely to make is reducing exposure to property. “Our portfolios won’t alter a great deal,” she says. “We’re looking at the long term. We have reduced exposure to commercial property [and] that might be something we’d continue for new portfolios. [But] our approach is the same.”
Property as an asset class has suffered huge outflows over the past few months, but for some investors prices might look attractive now.
Bowes says that more aggressive portfolios are likely to be more tactical and take contrarian or speculative positions. “Potentially for more aggressive investors you may take a tactical decision to include a speciality like financials,” she says. “But for balanced and cautious, the approach will not be changing.”
Like Bowes, David Wynn, investment director at Bentley Jennison, is looking to “shave off” his exposure to commercial property and transfer assets into portfolios offering diversification benefits.
“Asset-backed securities and hedge fund strategies are becoming more appealing,” says Wynn. “There is a stronger market for them now. We are looking to fine-tune the risk. We will do most of the work in the cautious portfolios. [But] we still believe property has a place. We’ve had a fantastic run on property. It has been the best-performing asset class for the last 15 years.”
Wynn plans to cut property exposure in his Cautious portfolio from 12-15% to 10-12%. In the Balanced AFI he plans to reduce the weighting to 7-10%. He will replace this with alternative vehicles, similar to the Cazenove Multi Manager Diversity fund, in which he has a maximum weighting. “We’ve had a lot of success with the Cazenove fund,” says Wynn. “It gets diversification through hedge fund exposure, agriculture and resources. It’s a structured portfolio.”
Over one year to January 28 the Cazenove Multi Manager Diversity fund is ranked eighth out of 89 funds in the IMA Cautious Managed sector. It returned 3.28% compared with an average return of minus 2.47%, according to Morningstar. Over three years the fund is ranked second out of 58 funds, returning 32.07% compared with 16.78%.
For Wynn, diversification is the key to protecting his clients’ assets. “We are finding there are a lot of other funds coming to the market that are similar [to the Cazenove fund],” says Wynn. “That’s great for us. Diversification is what we’re about. The design is to not lose money, especially in volatile times.”
Kypros Charalambous, associate director at Barclays Wealth, also plans to safeguard his portfolios from stockmarket falls. He says he might reduce his exposure to equities over the short term in both his Balanced and Cautious portfolios, increasing his weighting to fixed interest instead.
His Cautious portfolio is 44% in fixed interest, while the Balanced has 20%. Charalambous is looking to increase these weightings to 50% and 25% respectively, but stresses that these moves would be short-term.
He will also cut his exposure to Japan in the next AFI rebalancing. “I would probably take out the SG Japan Core Alpha fund and distribute some of that to the UK,” he says.
The SG Japan Core Alpha fund is first quartile over one and three years, according to Morningstar. It returned minus 8.17% compared with an average IMA Japan sector return of minus 15.21%. Over three years to January 28 it ranks first out of 49 funds, returning 28.07%, compared with 2.34%.
Nonetheless, Charalambous will not make drastic changes to his portfolios. He sees the market volatility as partly the result of a delayed reaction by investors and does not expect to change portfolios significantly. “I don’t see a knee-jerk reaction being necessary, he says. “We are going to go through a difficult two quarters, but after that we see markets improving.”
Wynn, too, is “relatively sanguine” about equities over the long-term. “We are still comfortable that emerging markets and the Far East are where growth is going to come from most. Our Aggressive portfolio has done incredibly well. We won’t make any changes [there].”
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 19 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).