‘As interest rates continue to be low, the yield grab continues. We would be very nervous about an overweight in any asset class giving us above-average yield. It’s really tough right now. Talk to any asset allocator,’ Citywire A-rated Coombs said.
One of the biggest culprits is commercial property, which has been an underweight in Rathbones’ private client portfolios for some time.
‘We have not been buying into the story that there is huge value in the secondary property market. It is a sellers’ market at the moment. There is a huge wall of money coming in.
‘I do not think we are in line for a 2008-style market crash but I think people will be sucked into a market with yields of 1% or 2% below value,’ he explained.
Over the past 12 months, Rathbones’ private client portfolios have been underweight fixed income. Within this allocation, the team increased their exposure to gilts at the end of last year. Coombs views gilts as an insurance policy against low inflation, as well as providing some portfolio diversification.
‘That was quite a hard call. Everyone is negative on gilts and we are as well, but when you look at your strategy you have to look at the risks of being wrong.
‘We feel we are in a period of reasonable growth and there is a risk of inflation being benign. We are not in the deflation camp but one of the key risks is we won’t be back in reflation.’
He added that a bearish view on bonds has not paid off recently.
At the end of June, Rathbones’ balanced private client portfolios had 6% in cash, 37% in bonds, 37% in equities, 11% in alternatives and 9% in actively managed strategies.
‘We have been wrong to be underweight bonds. Having said that, because we have been overweight equities, that has not hurt us. Bonds have produced better returns than we expected. Returns from high yield have been incredible.’
Overall, portfolios have maintained an overweight to equities, because Coombs believes there are reasons to be optimistic about certain parts of the equity market.
US equities, where he has a bias, are a case in point, representing a move that has ‘gone against consensus’.
‘Many asset allocators see the US as expensive but we think on a forward-looking basis it isn’t and is one of the most dynamic economies.
‘We like having the dollar and are bullish on the US story, and that has started to pay off.’
The team also has an overweight to Japan, a country undergoing profound change under prime minister Shinzo Abe’s three arrows of reform. Coombs said this call had gone from ‘from right to totally wrong, to right again’.
‘We were not as euphoric as many investors about Abe. Then we saw the reforms at the end of last year and our confidence in that overweight is rising. Valuations look as cheap as they ever have, and the rising consumption tax has not put us off – although it’s not very clever.’
Coombs acknowledges the Japanese play, alongside a call on the US dollar versus sterling, both proved painful earlier this year.
These allocation decisions, alongside a small and mid-cap bias, meant that Rathbones underperformed ‘as a house’ in the second quarter.
‘Mr Hodges made a name for himself by not being in crowded trades and being an excellent risk manager, such that his style was a very good complement/diversifier to other fixed income funds held. We are not convinced this will be the case with the new manager.’
Meanwhile, Alastair Mundy’s Investec UK Special Situations was also removed ‘owing to poor performance and a lack of conviction in the strategy and the manager, following an extended period of holding elevated cash’.
Rathbones’ medium risk model has posted a rolling one-year return of 9.7% versus 9.3% by the FTSE WMA Balanced Total Return index. The same model is up 7.7% on a rolling three-year annualised basis, matching the index, and over five years it is up 12.2% versus 11.4%.
‘Artificial intelligence is a really interesting area on a three to 10-year view. We think we are on the cusp of some significant disruptive technology.’
Hold: US equities-
‘We are overweight but I can’t see us increasing that because of the valuations.’
Sell: Commercial property-
‘A wall of money has gone into the asset class, pushing yields below fair value.’