One of the perks of being an investment manager is the continuously changing political landscape. Brexit, the election of Trump, and the rise of China have all provided a fascinating backdrop to making decisions.
At Parmenion we manage both an active and passive investment solution, plus a tactical ethical option. Changes to asset allocation may be based upon changes in the valuation of asset versus each other, momentum and sentiment, changes in the business cycle, and the political and monetary environment. We hope to identify those asset classes that will outperform over a period of 18 months to three years.
During the past six months we have made some changes to our asset allocation to reflect the changing dynamics on the outlook for various asset classes. First, we have taken some monies from UK equities primarily on concerns about the domestic economy.
Sterling weakness leading to higher inflation, plus a low savings ratio and flat wage growth will result in a weakened consumer. Add Brexit uncertainty and we have become more cautious on the outlook for this asset class. Thus we trimmed our holdings in Lindsell Train, Jupiter and Liontrust Special Situations.
It appears that the prospects for Europe have improved, however. Political risk has lessened with the election of president Emmanuel Macron in France and interest rate rises are likely to lag those of both the US and the UK.
The European Central Bank will be keen to avoid any policy errors and tip the region back into recession. Hence our move to move to overweight European equities.
Similarly, another overweight position is emerging markets which should benefit from a continuing pick up in world trade. We have added to our existing positions in Schroder Global Emerging markets, GS Emerging Markets Equity, Fidelity Emerging Markets and Somerset Emerging Markets Dividend Growth.
The Parmenion Tactical Solution comprises 10 risk grades built around five asset classes: managed liquidity, cautious, balanced, active and global alpha. By blending the asset classes we achieve 10 risk grades so that an independent financial adviser and their client can choose a risk profile.
Within each of the main asset classes of cautious, balanced and active, we invest across cash funds, fixed interest, UK, developed and emerging markets. We fluctuate the weightings in each to refocus our views on markets and to alter the risk profile of the tactical risk grades.
The tactical portfolios are built around a long-term strategic asset allocation weighting. This is constructed using 20 years of market data resulting in an efficient frontier from which 10 risk grades are allocated, each providing an investor with an appropriate risk/return profile over the long term.
Investors with a low-risk tolerance are exposed to a greater proportion of cash/defensive assets that an investor that can tolerate a greater level of risk the latter will be invested in more growth higher-risk asset classes such as shares.
Thus in a rising market the higher risk investor will achieve greater returns than a lower risk one, and vice versa when the markets are falling. The asset allocations is reviewed on annual basis to ensure it is still fit for purpose.
Over three years to the end of October, the active balanced portfolio has returned a pleasing 36% versus an ARC Sterling Balanced return of 18.8%, and 10% over one year versus 6.5%.
Simon Brett is chief investment officer at Parmenion