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Iveagh: investment environment too good to be true

Iveagh: investment environment too good to be true

Wealth Manager was given exclusive access to Iveagh’s asset allocation meeting, where a debate around whether to raise risk in the Iveagh Wealth model portfolio dominated proceedings.

The portfolio is currently weighted to risk level five, with around 50% allocated to equities. Chief investment officer Chris Wyllie reignited a debate that had featured in the firm’s December meeting, over whether risk should be raised.

‘One thing people have commented on is the Vix being very low, which is not to be sniffed at,’ he said. ‘Very short-term volatility expectations have collapsed, but everyone knows we have got the next stage of the budget talks coming in the US in March.’

Wyllie, who chairs the investment meeting, prefers the team not to arrive having already reviewed the investment data. Instead, he oversees a screen-based meeting, where a large portion of the time is spent looking at the data and considering options.

‘I have been on a lot of these committees and there’s nothing wrong with putting out those packs, but people read them three days or so before and there’s a lot of assumed knowledge,’ he said. ‘What happens is people come into the room and they may or may not know it, but their position is already established.’

After reviewing the price of FTSE put options, the team agreed they would think about going long volatility through options over the next six weeks, arguing that the options are currently priced at relatively cheap levels. The portfolio currently has a 0.6% exposure to options and warrants.

William Beverley, head of macroeconomic research, suggested the portfolio should be moved up to a higher risk benchmark, pointing out that several of the macroeconomic and technical signals in Iveagh’s process were already at green.

The team applies a traffic light system to factors, such as leading economic indicators, valuation and technical analysis.

‘What would it take for us to go to a six, when you already have three or four traffic lights that are green?’ Beverley asked.

Wyllie said: ‘In a normal world you’d wait for the markets to come off a few percent. It’s just some of those sentiment indicators that are a little bit worrying.’

Beverley agreed the investment environment is ‘too good to be true in the short term.’

‘It’s been a jolly nice run,’ Wyllie added.

‘There’s certainly a risk in bonds at the moment,’ Beverley said, while the CIO added there is a risk of government bond yields rising.

Earlier in the year, the team trimmed overall bond exposure to 23.2% ‘just to have no more than we have to have for portfolio defence’.

‘We have taken government bond weightings down to 7.5% so we are 2% underweight there,’ Wyllie said, although the weighting is still classed as ‘adventurous’.

‘You need a good reason to hold anything less than an adventurous weighting in government bonds because you need something there just for portfolio protection – but I don’t want to have any more there than we have to,’ he explained.

Given the mix of positive signals and uncertainty over sentiment, Wyllie said he did not see a reason to up risk at the moment.

‘I don’t think markets are getting carried away with themselves that much. I don’t feel under any pressure for us to put more risk in the profiles because I think we have got enough.’

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