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GHC takes 20% cash position as global uncertainty mounts

GHC takes 20% cash position as global uncertainty mounts

GHC Capital Markets investment manager Richard Harper is holding around 20% of the firm’s balanced portfolio in cash, pointing to an uncertain global economic backdrop and political headwinds. He is backing equities and commodities to outperform.

Portfolio positioning

Harper opted to take advantage of the market sell-off that followed the Japanese earthquake, tsunami and nuclear crisis by buying into the Japanese market through the GLG Japan CoreAlpha fund.

‘We felt the market had overreacted and downgraded companies way too far,’ Harper explained, adding that he has already made money from the trade.

Over the past year he has reduced bond exposure by 15% to just over 20% of the firm’s Resilient 5 (risk grade five in GHC’s optimised portfolio service). He slashed exposure to strategic bond and corporate bond funds that write credit default swaps, as he feels this increases the fund’s risk exposure.

Resilient 5 has a 20% cash position, after Harper took profits on emerging markets at the end of last year and is in no rush to reinvest. The fund has 30% in UK equities through ETFs and actively managed funds, including the JOHCM UK Equity Income fund, 23% in global equities, 6% in commodities and 1% in the HSBC Infrastructure trust.

Positives and negatives 

Harper highlights the fund’s exposure to equities and commodities as key drivers of performance over the past year. The firm’s balanced portfolio has posted a 12.4% return with a Sharpe ratio of 0.32 over the past 12 months, while the IMA Balanced Managed sector was up 11.6% over the same period, according to Lipper. Over the past two years the same portfolio is up 36.8%, while the IMA Balanced Managed sector posted a 42.7% rise.

Harper highlights the Liontrust Special Situations fund as a key contributor, having risen 20%, but acknowledges his Latin America call through the Martin Currie Latin America fund is yet to pay off. ‘Our market timing was not great, but we were happy to back the fund from launch and wait,’ he said.

Harper wishes he had invested in gold earlier, but has taken profits on BlackRock Gold & General after entering the market one year ago and doubling the fund’s commodities weighting. He also acknowledges that moving out of gilts too early may have impacted on performance.

What will drive performance?

As the Japanese and eurozone debt crises continue, alongside unrest in the Middle East and interest rate rises in the UK looking likely, Harper is cautious.

‘The problem this year is that you can look at economies but an awful lot is happening on the political and geographic side, so I am erring on the side of caution as things look even more uncertain than they were a year ago. The announcement that Ireland needs another bail-out makes me think what else is under the iceberg among financial institutions, so cash looks quite attractive,’ he said.

He anticipates equities will continue to perform well, pointing to improving corporate profitability and cash on the balance sheet, which is likely to result in increased levels of mergers and acquisition activity, which should buoy equity markets.

‘We are happy to invest in equities and hold a cash weighting as a security anchor. I do believe that commodities, particularly agricultural commodities, are in a five-year bull phase and we have got a 3.5% exposure to this,’ he said.

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