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How RBC aims to mitigate the great interest rate rise threat

How RBC aims to mitigate the great interest rate rise threat

RBC Wealth Management has taken a brave move into emerging market debt on the back of what it views as attractive valuations following the taper sell-off earlier this year.

Charles Lewis, head of UK discretionary investment management at RBC Wealth Management, describes it as one of the biggest moves in the firm’s sterling balanced portfolio this year.

The team has gained access through Bluebay Asset Management’s funds, finding value in the local currency space. These include the Brazilian real and Polish złoty, which were hit when US Federal chair Ben Bernanke (pictured) announced his intention to taper quantitative easing.

The emerging market debt trade formed part of a move to diversify the portfolio’s fixed income allocation. A key part of this was a motivation to lower duration ahead of anticipated interest rate rises as the global economy recovers.

‘We feel there is still room for traditional fixed income allocation in our portfolios, albeit at a slightly smaller rate and with a reduced duration.’

Over the last 12 months, Lewis has increased exposure to absolute return bond funds, as he values their ability to go long and short in a challenging environment.

In equities he is finding value in financials, alongside consumer staples and discretionary stocks. The portfolio has a 30% allocation to UK equities, where he favours the Baillie Gifford and Cazenove teams.

‘Baillie Gifford likes companies where profits are driven by overseas earnings, so we are playing the ex-UK growth and value theme,’ Lewis said.

Over the last year he has introduced BNP Paribas as a European equity manager and recently bought into US-based Aurelian, a global commodities fund, which has the ability to go both long and short.

The team also slightly upped exposure to emerging markets during the year.

Performance

Over the past 12 months the portfolio has posted a 6.2% rise, slightly outperforming the ARC Sterling Balanced Asset PCI benchmark, which is up 4.8% over the same period. Over the past three years, the model is up 12.6% against the benchmark’s 9.8% rise.

Lewis highlights the portfolio’s UK equity exposure as a key driver of performance.

Cazenove has had a very good year, and continues to outperform. The team has a pragmatic and business-cycle approach to investing and it is now moving into later stage industrial recovery stages after performing well from the early recovery stages stock,’ he said.

Conversely RBC’s allocation to an Aberdeen long-only Asia fund, run as a segregated mandate for the bank, meant the portfolio did not participate in the Japanese rally earlier in the year.

‘They have a good long-term track record, but they have not been keen on Japan since last year. That said, their stock picking ex-Japan has been good,’ Lewis said.

He admitted the portfolio’s emerging market debt and equity exposure had also proved slightly disappointing so far.

So, looking ahead, what does he anticipate will drive returns?

‘We feel that in any rising interest rate environment, the multi-strategy fund of hedge fund managers will continue to add value where it could prove more difficult for the traditional fixed income managers to add huge amounts of absolute return,’ he said.

‘If interest rates and inflation don’t surprise to the upside, we still feel there are pockets of opportunities within the credit space, notably in the financial sector.’

BUY: Absolute style fixed income space:  To complement the reduction and difficulties we might see from more traditional managers

HOLD: Equities: I am happy to hold them as they offer good risk adjusted returns

SELL: High Yield debt: We see the class as too volatile, and it would be superfluous to hold it as we already have exposure to the EMD space, where we see more opportunities in the medium term.

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