Tier One Capital has shifted all of its clients’ allocation to fixed income into structured products.
Portfolio manager Tristan de Gabiole said this was achieved through the boutique’s recently launched four-strong range of risk-rated structured product portfolios. ‘Structured products benefit from lower interest rate sensitivity as well as varying equity risk, and can provide you with a protection of up to 60%,’ he said.
‘A rise in interest rates will predominantly have an impact in the fixed income sector so we have switched our bond allocation [UK gilt and corporate] to a portfolio of synthetic zeros that currently offer an average net return of 4.3%, as long as the markets [FTSE 100 and S&P 500] don’t fall by more than 45% and none of the counterparties go bust.’
His team spread counterparty risk among five banks, with a maximum 30% exposure to any single institution.
In Tier One Capital’s balanced portfolio, de Gabiole is targeting annualised returns of between 6% and 8%. Client portfolios typically comprise 20-30% in structured products with the remainder held in exchange traded funds (ETFs) and cash.
Within equity, the team has reduced its allocation to global emerging markets and reallocated to the DB X-Trackers S&P Select Frontier and the SPDR MSCI Beyond Bric ETF.
‘By excluding the Brics, this ETF gives more weight to the smaller emerging market countries,’ he said.
Despite short-term concerns around volatility, Japan remains de Gabiole’s favourite long-term play. ‘I believe policymakers will further weaken the yen in order to increase exports so a currency hedged ETF makes sense,’ he said, pointing to the portfolio’s exposure to the iShares MSCI Japan GBP Hedged ETF.
De Gabiole has moved neutral on the US after taking some profits, but has retained exposure through a range of physical ETFs. However, he remains wary, saying: ‘If there is a market downturn, I’d be more afraid of the US than Europe, because their market has higher to fall from.’
Valuations in Europe are ‘looking more interesting’ in the periphery de Gabiole said, and he is playing this through a combination of standard and alternative ETFs.
‘In the smart beta space, I hold the Powershares RAFI Europe, as they are not market weighted but are based on four fundamentals, including dividends, cashflows, book value and sales,’ he added. ‘I prefer this strategy to the new iShares low volatility one.’
The portfolio also has a 4% allocation to global clean energy, having recently introduced the iShares Global Clean Energy ETF.
‘The scale of pollution in China and the resources needed to address the country’s environmental issues should spark a clean energy boom which could provide extremely attractive returns for investors.’
De Gabiole declined to disclose performance figures, saying the business has only been trading for 18 months.
Buy: SPDR MSCI Beyond BRIC ETF, DB X-Trackers S&P Select Frontier (GBP):
‘We reduced global emerging markets, and reallocated beyond the Brics, giving more weight to smaller countries and frontier markets.’
Hold: US equities
‘We remain cautious on the US as valuations are higher than in other developed markets. But it shows strong signs of recovery, with steady jobs growth in May.’
Sell: Gilt and UK Corporate bonds
‘We have been allocating into structured products that benefit from lower interest rate sensitivity as well as varying equity risk.’