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Tactical asset allocation changes

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Commentary from the Chair

The U.S. dollar has been stubbornly strong. In the absence of decisive fiscal policy, doubts are growing about the effectiveness of looser monetary policy worldwide, as negative interest rates and balance sheet expansion may be approaching their limits at the European Central Bank (ECB) and the Bank of Japan (BoJ). Some $17 trillion of debt trades with negative yields, which is accommodative up to a point, but eventually begins to stifle rather than stimulate investment, while also depressing bond market returns. Geopolitical tensions have risen in the Middle East, and the U.S. is about to enter a bruising election year.

While the asset allocation committee maintains its view that a U.S. or global recession is unlikely before the end of 2020, late-cycle dynamics are making themselves felt, and we think the risk of market dislocation is rising. This led us to a broadly lower risk profile in our views at the asset class and regional level. This translates to a preference for interest rate risk over credit risk and for UK and Japanese equities.

The committee judged the outlook to be broadly balanced, weighing risks to the downside equal in scope and scale with those to the upside. Accordingly, the committee moved to ensure portfolios were not over-exposed to those areas of investment heavily reliant on sustained high and rising levels of economic growth. Specifically, we felt it prudent to trim an overweight in emerging market economies (EME) by moving back toward the neutral position. The committee remains comfortable with material investment in EME in the long-term and may look to re-establish an overweight as the outlook improves or, should the outlook deteriorate, as and when valuations are more compelling. Corresponding with a decrease in EME, the committee moved to increase equity exposure in Japan. Japan’s economy has stabilised following close to two decades of malaise. We believe that Prime Minister Shinzo Abe’s package of reforms, allied with strong electoral support for those reforms, will underpin further progress in the medium term. An increase in Japanese equity exposure serves two further purposes. It helps to maintain our overall equity content at what we consider to be the appropriate level given the balance of risks, and it secures weightier exposure to the Japanese yen. The committee considers that the yen’s ‘safe-haven’ status – given to assets with a tendency to appreciate in value during periods of stress in broader markets – will add further resilience to the portfolios.

Steve Williams, Independent Chair

Asset allocation in detail

Asset Class = + ++ Comments
Managed Liquidity   
  
  
  
  
  
Gilts   
  
  
  
  
  
  
  
Overweight: Gilts are preferred to Corporate Bonds given we believe their defensive qualities remain during times of stress. We have a preference for interest rate risk above credit risk at this point in the cycle.
Index Linked Government Bonds   
  
  
  
Underweight: Given the current market environment and progressive weakness in global demand we do not feel an inflation hedge is a worthwhile use of capital.
Corporate Bonds   
  
  
  
  
  
Underweight: We question whether yields offer sufficient compensation for the risk of rising defaults in a tougher economic environment. Such tight spreads at a time when corporate debt has been increasing creates an asymmetric trade off.
Global and Strategic Bonds   
  
  
  
  
  
UK Commercial Property   
  
  
  
  
  
  
  
  
UK Equity   
  
  
  
  
  
Overweight: The UK remains cheap versus other Developed Markets. It is an international market, made up of leading global companies. The negative sentiment around Brexit has meant fund flows have been largely absent, offering a very attractive entry point from a valuation perspective.
US Equity   
  
  
  
  
  
Europe ex-UK Equity   
  
  
  
  
  
Japan Equity
  
  
  
  
  
  
  
Overweight: Japan offers equity exposure but with a defensive beta due to the safe haven status of the Yen.
Asia ex-Japan Equity   
  
  
  
  
  
Underweight: Continued trade war uncertainty has created headwinds for the region.
Emerging Market Equity   
  
  
  
  
  

Weighting to asset classes where we have a neutral view will be in accordance with our long term strategic asset allocation.

Tactical asset allocation committee members

Our tactical asset allocation committee is made up of an independent chair and Parmenion Investment Management representatives. A full list of the committee member is below:

Steve Williams
Simon Brett
Peter Dalgliesh
Tom Sayers
Tim Willis
Jasper Thornton-Boelman



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