Towry head of investment Andrew Wilson was betting on rising volatility providing a cheaper entry point to risk assets, but it was his passive allocation that was the big winner in 2013.
In the firm’s intermediate risk-targeted strategy, Wilson had 11.2% passive exposure in US and also UK equities, which returned 211 basis points (bps) and 293bps, respectively. The rest of the portfolio’s asset allocation was held in active managers.
Over the last 12 months, Wilson took profits from equity positions where they had drifted above target weight, with a view to recycling the money into other cheaper or underweight assets, although he admits that he did not get the hoped for opportunity to buy an equity market sell-off.
‘We expected a 10% excess correctional drawdown, particularly in the autumn, and to buy some more risk assets more cheaply at some point, but it never really happened,’ he said. ‘It was a bit of a shame from a strategy point of view.’
More recently, Wilson has maintained a small overweight position in long only equities, with a 56% allocation, but also with exposure to long short equity, with holdings including a large position in the Majedie Tortoise fund, managed by Citywire AAA-rated Matthew Smith and Tom Morris.
He holds UK and US smaller companies as separate asset classes totalling 9.6% , including a holding in the River & Mercantile UK Smaller Companies fund. ‘The UK small caps’ risk was well rewarded in 2013 with a 220bps contribution to return while US small caps added an extra 84bps.’
In Europe, he retained a small exposure (4.2%) through ‘long-time core holding’ JOHCM Continental European , run by A-rated Paul Wild, along with the Henderson European Focus trust and the BlackRock Continental fund, managed by + rated Vincent Devlin.
‘A lot of investors were adding to European equities over the summer on the basis that they were relatively cheap versus the US, but our view was that while it was a bit cheaper, it was getting priced in quickly.’
However, Wilson said his allocation to the region could climb as high as 10%. ‘There will be an occasion to buy Europe more cheaply if we get a “European event” later on this year, possibly from the banking stress test, and ultimately some renewed eurozone volatility. We’ll lean against the wind on that, and look to buy in cheap.’
In Japan he is 'fairly neutral', with a 6.1% exposure.
‘We were worried at the end of 2012 that it was becoming a bit of a consensus trade. We let it run in 2013, and didn’t take profits, so even though we didn’t add any more, we are pleased with the performance.’
Notwithstanding the ‘yen issue’, the allocation returned 146bps for the portfolio. ‘The only question about Japan was whether we could have held more than we did without having 20/20 hindsight,’ he added.
In fixed income, Wilson has been running record-low exposure to traditional bonds at 9.3%. He instead highlights Legal & General Dynamic Bond as a top pick, within “relative value” fixed interest funds.
He also has a record 24% exposure to non-traditional strategies such as long/short equity strategies (4.9%), relative value fixed interest (4.1%), global macro (3.6%) and managed futures (6.1%). Exposure also includes traded volatility (1.4%) and event driven strategies (2.2%), including the York Event-Driven fund, a strong performer last year.
His small position in commodities, which is half-weighted to gold, cost the portfolio 37bps over the year.
Over the past 12 months, the intermediate portfolio has posted an 11% return with a volatility of 6.6%, and over three years it has delivered 10% with a volatility of 8.1%. Performance was driven by equity exposure, and US equities in particular.
‘It wasn’t all that long ago when clients were asking why we owned eurozone exposure at all. Similarly to our Japan allocation, you could instead question whether we had enough in Europe in 2013,’ Wilson said.
While fixed income underperformed detracting 23bps, he says gilts ‘only lost 1%’ on the back of his preference for shorter duration paper. International assets were diluted by 200bps, due to sterling strength, he added.
In the event of a future drawdown, he expects to add to his global property securities exposure, and, ‘at some point’, to emerging market debt. ‘It could look like a good long-term bet.’
Buy: BUY Long volatility strategies
‘Volatility is cheap. We’ve been through a period of low volatility, which is not sustainable, so we’ll look at more normalised conditions’
HOLD Commercial property
‘There is reasonable value in global property securities vs global equities at the moment and in the event of a selloff, property will be an interesting buy. Bricks and mortar property can continue to go well too, and is a bit of an inflation proof’
SELL Any overweight vs target exposure
‘If your equity exposure has outperformed and the overall portfolio risk profile has consequently changed, then batten down the hatches where appropriate’