Caution and good timing have helped City Asset Management’s (CAM) managed portfolio service (MPS) win the income war for clients in 2018. But US equity markets’ ‘collision course’ with the quantitative cycle is causing concern for the asset manager.
The London-based firm aims for ‘real’ inflation-beating returns, and its four MPS offerings each have their own target. ‘Real2’ aims to outperform the consumer prices index (CPI) plus 2% per year, while ‘Real3’ aims to outperform CPI plus 3%. ‘Real4’ and ‘Real5’ aim to beat CPI with 4% and 5% returns respectively.
CAM’s investment management team is seven strong, with a small financial planning team of two. Senior portfolio specialist Philip Bagshaw (pictured) describes 2018 as ‘one of the most stable’ years in recent history. He says CAM has taken a long-term view of risk and asset allocation, using several rules of thumb it has adapted.
‘To reach CPI plus 2% growth portfolios you need around a third of equity volatility, CPI plus 3% you need around 50% equity volatility, CPI plus 4% requires around two-thirds equity volatility, and CPI plus 5% it’s around 80% equity volatility,’ says Bagshaw.
However, he says asset prices are currently ‘quite expensive’ and the firm has been taking slightly less risk than those rules normally permit.
CAM had believed central bank liquidity would turn negative in 2018, which fuelled a more cautious approach through the middle of this year. However, it remains underweight fixed income. ‘We tend to have more in alternatives,’ Bagshaw says (see ‘medium risk’ portfolio Real3 asset allocation, above).
Bagshaw says a call CAM made in 2018 that did not pay off is its US equity value holdings, notably the Aviva US Equity Income fund.
‘Part of the reason we held it is we have held it alongside half the exposure that is in a US tracker, and it’s partly to balance out some of the narrow leadership we’re seeing,’ he says.
‘Some parts of the US market that have really driven the overall indices became quite expensive, so we wanted to balance that out with some value exposure.
‘We were thinking growth can’t outperform value forever but that’s not proven to be the case so far. Growth has just powered on, and that’s something that’s worried us in terms of the health of the overall market.’
Bagshaw believes the US equity market is on a collision course with the quantitative cycle. ‘We’ve been envisioning this collision course between the equity market going up and the quantitative ties, namely the increasing of interest rates. At some point we just thought something had to give,’ he says.
‘Our concern is that even though the economy isn’t going into recession, when you start to see a pricing of assets from a different interest rate environment and a different quantitative tightening environment, then that becomes vulnerable.’
Recent changes to the MPS proposition include CAM’s 30 September rebalance, which increased exposure to structured products in the form of the Fortem Progressive Growth fund, which launched in November 2017.
The firm took down some of its long-only exposure and sold an equity fund to pay for that move, which proved fortuitous days later when the markets started to sell off.
Looking forwards, Bagshaw envisages ‘big moves’ between asset classes in 2019, which CAM will need to position for. He does not think we are heading ‘backwards’ to 2017, when the market kept going up.
‘There’s definitely a part of my mind that says the US isn’t going to be making higher highs,’ he says. ‘It’s fair to say we don’t envisage things being easy in 2019 going into 2020.’