Tacit Investment Management's chief investment strategist Paul Wharton discusses focusing on equities and tackling the UK market in 2018.
'Our portfolio management stance reflects our long-running optimism that the depth and severity of the crisis a decade ago would be followed by a long, slow recovery.
Price pressures are low because global demand remains insufficiently robust to absorb global supply and most policy levers remain geared to supporting recovery. Even the pace of fiscal consolidation has slowed, further supporting growth.
In this environment our asset allocation remains focused on equities, particularly where support from the authorities remains particularly strong; principally Japan and the United States. Our core investments in these areas are the active management teams of Man GLG Japan and Loomis Sayles in the US where we allocate 10% and 5% respectively in our ‘steady growth’ strategy.
One of the key surprises last year was the modest inversion of yield curves in the US and the UK and the weakness of the US dollar given the likely trajectory of US interest rates at the start of 2017. We still believe that fixed income markets are expensive generally and that growth-supportive policy will force a steepening of the yield curve. We also believe that the monetary authorities will focus on the path of ‘real’ interest rates and will be content to be somewhat ‘behind the curve’ as inflation picks up. Sharply positive real rates would be fatal to the current global expansion.
As we expect yield curves to steepen, we include a specialist fund in Jupiter Financial Opportunities (7.5%). We expect the combination of reduced regulatory fines, steeper yield curves and demand for credit to support net interest margins and therefore bank equity.
We continue to hold high yield credit where we allocate 10% to Axa Short Duration High Yield Bond fund. Elsewhere, to hedge the possibility of a pick-up in inflation via a rise in wage growth, we allocate 5% to USD Tips via the IShares II ETF and 5% to the UK linker market using the L&G Index Linked Gilt trust.
Our approach is indifferent to the investment vehicle employed; we mix passives with active funds and in the UK we include investment trusts in our strategies.
Two investment trusts feature in our current allocation: the Scottish Mortgage Trust (5%) and the Finsbury Income and Growth Trust (7%). We believe that employing sharply contrasting management styles dampens volatility while amplifying the opportunity set for our investors. We seek diversification but not duplication.
For rather obvious reasons the UK is the most difficult market to consider in 2018. Like many of our colleagues, we are caught between our sterling investor base, the volatility of sterling (in either direction depending on the Brexit negotiations) and the increasingly apparent divergence in UK growth compared to the rest of the world as Brexit results in deferred/cancelled investment hitting near-term growth.
Our core investments in the UK are the JO Hambro teams Opportunities and High Income funds, to which we allocate 10% each, and the M&G Recovery fund reflecting the discount on UK assets relative to other markets.
In the UK, Brexit should provide ‘active’ managers ample opportunity to demonstrate their skills.
To 30 November 2017, our Steady Growth portfolio has delivered one, three and five-year returns of 10.2%, 31% and 58.8% respectively net of annual fees with net income reinvested.
Overall, we believe that the current robust global economic expansion has further to run and we are positioned accordingly.'
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