Rathbone head of multi-asset David Coombs has been switching emphasis from high-yielding equities to focus on dividend growth, while keeping an eye on sectors that can cope well in the event of higher interest rates.
Coombs is responsible for the range of multi-asset funds at Rathbone Unit Trust Management, including the £7m Rathbone Mulit Asset Enhanced Growth, £60m Rathbone Multi Asset Strategic Growth and the £49m Rathbone Multi Asset Total Return portfolios.
A recent move has seen the manager shift emphasis within his allocation to equities. He says: “We have switched our equity emphasis away from high-yielding equity strategies into dividend-growth strategies.”
Coombs is also looking to increase exposure to US financials because of the sector’s ability to deal well in an environment of higher interest rates.
He says: “We are also trying to look at equity markets that will do well in the scenario of higher interest rates and that is financials. Particularly US financials – we really like that area and will look to increase our exposure there.”
Coombs also details that he has recently bought tail-hedging protection to cover his “entire equity exposure” in the event of a significant sell-off of 10 per cent or higher.
He adds: “That is one of the key lessons that we learnt from 2008. Asset allocation will get you so far but if in the event of a huge selling risk, we need to have some insurance. This is also not correlated to either equities or bonds, which is a marriage we are looking for.”
Coombs also highlights large defensive equity stocks such as Nestle, where he has been reducing exposure within the Rathbone Multi Asset Total Return portfolio, on the basis that they are becoming expensive and, in turn, more risky in the short term.
He says: “If something is expensive, it is more risky than if it is cheap. These stocks are seen as defensive and less risky but I would argue that at the moment they are more risky.”
Coombs goes onto argue that while funds taking a 10-15 year view may choose to stay in these stocks, there is risk of volatility in the near-term.
He says: “You might see a little bit more volatility in the short-term because these stocks are priced that any surprises on understated earnings would be savagely marked down, I suspect.”