2020 ICM Q2 – Model Portfolios

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  • April 8, 2020

The performance of the models up to the sharp selloff in late February was encouraging. The from mid-February have been broadly in line with the benchmark although there is always a difficulty in determining the relative performance during volatile markets as there are timing differences between the benchmarks and our models’ holdings on FE. The February data definitely reflects this, as there was a very sharp fall on the final trading day of the month.

Managed Portfolio Service

There was some underperformance in the most cautious portfolios as we have avoided the use of Gilts, which have been the standout performers during the selloff. While our allocations to corporate and strategic bond funds have held up well, the widening of credit spreads has weighed on performance. Nevertheless, we continue to stand by this strategy while the potential return going forwards from government bonds is so low.

Relative asset allocations have been a mixed bag, with our Emerging markets/Asia overweight along with the underweight to Europe helping, and the overweight to the UK particularly weighing on relative performance. The level of volatility across all assets makes conducting a post-mortem at this stage very challenging.

The Ethical models continue to have very strong performance this year performance. Now running for nearly 2 years, they have all delivered returns in excess of their benchmarks on an absolute basis. As discussed previously, these portfolios (and the passives) generally have an ongoing vol that is higher than their hybrid equivalents. This has been seen to some extent during the market selloff.

The upside/ downside capture metrics continue to be attractive in aggregate (considering the disparity in the Feb data figure). We continue to use both the beta measure and simple calculation; however, these deliver broadly similar results. Overall, we continue to capture most of the upside while limiting the participation in down months.

Key Decisions

We’ve tried to condense our key decisions, highlighting the rationales behind them.

  1. Reduce our overweight to Asia/Emerging Markets
    1. We remain positive towards Asian and EM equities
    2. Strong relative performance from the Asian markets, in particular, has made this allocation less attractive than it was
    3. Asian equities will be equally exposed to a prolonged impact from the Coronavirus, potentially more so than their US/ developed market counterparts.
  • Reducing underweight to US equities
    1. The fall in markets gives a good opportunity to reduce this underweight, although remaining modestly so.
    2. US equities may bounce the hardest in any rally
    3. Many US companies may be better placed to prosper in a more negative scenario
    4. We do not want to have such a significant relative weighting in such an uncertain period.
  • Maintain Underweight to Fixed Income
    1. For sterling investors yields remain very low, providing limited value relative to other asset classes, this has increased once again in the quarter
    2. Gilts only offer negative real yields
    3. Corporate bond spreads have widened but this may be reflective of the potential risks.
  • Maintain Overweight to Alternatives
    1. Provides the balance to the underweight fixed income exposure
    2. Aim to generate highly diversified returns, potentially reducing overall portfolio risk while enhancing expected returns. As a result, this should lead to improved Sharpe ratios.
    3. Addition of gold allocation within this section, increasing diversification and looking to provide protection in an extreme negative scenario
  • Maintain a small overweight to UK equities
    1. Valuations remain low on an absolute basis and relative to other equity markets
    2. The discount in the UK equity market between domestic and internationally focused businesses remains, although this has lessened slightly following the election
    3. Sterling appears undervalued on a long-term basis
    4. NOTE: our strategic overweight to small and mid-cap equities will negatively impact portfolios in the event of a hard Brexit, at least in the short term. We believe that this part of the market represents a multi-decade value opportunity. The smaller end of the market has also been hit particularly hard in the Coronavirus related selloff.

Core Asset Allocations

Clearly there has been some dramatic market movements, changes in valuations and the outlook for most asset classes. However, looking forwards we believe that risk assets are currently looking very attractive, certainly in our central scenario of a quicker than expected defeat of the Coronavirus pandemic and a return to normality. This has led us away from selling down equities as a knee jerk reaction to the rapid falls experienced. However, we are cognisant of the absolute portfolio positioning and what the act of rebalancing will have on a portfolio attached to the models. We are also aware that the market may not yet have reached the bottom.   

As a result, we have reduced the % weighting to equities at this rebalance, although this will still lead to an addition in absolute terms for most clients. This will leave us some ability to add more risk if we feel it to be necessary at a future date. This caution is more abundant for lower risk clients.  

Within equities, we have looked to reduce the overweight to Asian equities as these have performed surprisingly well relative to other markets. The proceeds have predominately been reinvested into US equities, reducing our underweight. This change will moderate our active geographic calls.  

Finally, within alternatives, we have added in the Blackrock Gold and General fund. This is primarily as a tail risk protection, where we anticipate that the gold price would rise significantly from its current level. The operationally geared nature of gold mining companies means that there is a significant amount of upside if this were to occur. Furthermore, we also believe that given the already implemented central bank action and the liquidity driven selling of gold and mining companies means that even if our optimistic outlook was correct, that there would still be gains from this investment.  


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Posted By Will Dickson

Chief Investment Officer Will Dickson is a Chartered Wealth Manager as part of the Chartered Institute of Securities and Investment (CISI) qualification scheme. This recognition was obtained following an MSc in Finance and Investment from the University of Exeter, and an Accounting and Finance BSc from the University of Bath. Will’s exceptional talent is recognised by CityWire’s Wealth Manager, having been named as one of the UK’s Top 30 investment managers under the age of thirty for the last three years. Will manages and oversees P1’s range of investment portfolios. Working with the Investment Team, Will shapes the investment policy and fund selection for our Passive, Hybrid and Ethical and Sustainable portfolios. In conjunction with managing the fund portfolios, he oversees and our AIM Inheritance Tax and Tier 1 Investment Visa equity portfolios. Will has joint written articles with P1’s Head of Research, Dr Rayer. Their article “Hypothesis: Risk, like Mass and Energy, can neither be created nor destroyed” featured in the CISI’s The Review of Financial Markets. In addition to contributing to articles with Dr Rayer, Will often delivers P1 CISI Endorsed lectures to Independent Financial Advisers. You can see Will’s take on weekly investment news here.