Tcam investment manager Oliver Murray says the final leg of a bull market is often accompanied by a sharp move upwards – and there is evidence to suggest the current cycle could continue for a further 18-24 months.
But as conflicting data, mixed messages and the ongoing political uncertainty make predictions hard, the firm is looking to position portfolios in a way that will drive performance in either environment.
Two key changes in asset allocation have marked the past year: moving towards more value-oriented equities and reducing duration by adding exposure to areas such as financial debt.
The firm’s risk group five balanced mandate portfolio is still overweight equities. A 63% exposure to the asset class is split 48% in global and 15% in domestic equities. But this has focused on valuation, with the aim of avoiding bond proxies trading on inflated multiples that are likely to be worst affected in the event of a market pull back.
‘While “reflation trade” momentum has cooled over the past quarter, our preferred managers have continued to perform by virtue of underlying stock selection,’ Murray (pictured) said.
‘Long short equity exposure hampered performance in 2016, with macro factors diverting attention away from fundamentals. These holdings remain a key conviction view on a longer-term basis and performance has picked up year-to-date as investors return their attention to valuation.’
He said Shawbrook Bank, which was bought out by a private equity consortium, is a good example of the shift.
Murray pointed out that a number of the businesses the firm invested in through its direct equity strategy, VT Strategic Value, have been subject to M&A activity as the market found they were undervalued.
E2V Technologies, which was acquired by American firm Teledyne in a deal worth £620 million, a near 40% premium to the share price, is another example.
The remaining part of the portfolio is invested 19% in alternatives and 18% in short or very low duration fixed income, an area Murray views positively at the moment.
‘Improved capital adequacy across many of Europe’s blue chip banks, coupled with changing regulations dictate that the risk-reward dynamics there are attractive,’ Murray explained. Therefore, an average client portfolio would have 5-10% in the Bluebay Financial Capital Bond fund, he said.
During the past three years, Tcam has delivered decent returns. In the second half of 2016 the shift towards value proved a key driver of performance, as financials outperformed on speculation of normalising monetary policy.
As Tcam’s strategy focuses on preservation and growth of long-term capital, Murray said asset allocation may be differentiated to many multi-asset benchmarks. Performance is therefore measured against FCA prescribed, long-term absolute return targets.
In the 12-months to end of May, the average risk group five balanced portfolio returned 16.7% against a target of 6.3%, and 27.5% against a target of 20.1% over three years.
Looking into the future, Murray considers the current market as a particularly tricky one to call: Emmanuel Macron’s win in France looked to have given investors some much needed respite from political worries, but a hung parliament in the UK has done little to ease pre-Brexit uncertainties. Tensions between the US and North Korea also continue to bubble below the surface, while longer-term China worries remain.
‘With that said, investor sentiment has not yet reached the euphoria that traditionally accompanies the end of a bull market and we believe that the current rally may have some room to run. We remain fully invested but have added some protection – and are continuing to explore further options in this area – to protect against a market sell-off.’
Earlier in the year, the firm also moved away from index-linked exposure. ‘Breakevens moved sharply in the second half of 2016 and we see the potential for real yields to rise, impacting capital unless the bonds are held to maturity,’ Murray added.
Buy: European equities.
‘Following a prolonged period of underperformance versus the US market, the region looks set to prosper after navigating through various political risks.’
Hold: UK equities.
‘The process within our direct equity fund, VT Strategic Value, focuses on valuation, and allowed us to buy good companies that the market has discounted.’
‘In both equities and bonds as yields look set to rise.’