Associate director of fund management Steven Richards says Thesis Asset Management is ‘still suffering the after-effects of having higher domestic UK exposure post-EU referendum when sterling fell significantly.
‘Because we were overweight, underlying assets didn’t get the pick-up of currency gains they would have if we had a higher overseas exposure’, he says.
‘Other managers with higher international exposures benefitted unwittingly through just getting that one-off 20% kicker from sterling depreciation. I don’t think they got that from knowing the outcome of the referendum. Because we were biased domestically, we didn’t get the same roll of the dice they did.’
Model portfolio manager Adam Burniston (pictured) adds: ‘We went defensive earlier than other managers, so we took a bit of duration out of our fixed interest exposure and increased our cash weightings two years ago. We might have lagged in the medium term but it’s now starting to pay off’.
In Thesis’s moderate risk portfolio 4, UK equity exposure is 25.1%, international allocation 4.5%, Europe 3.2%, US 6.6%, Japan 2.5%, and emerging markets and Asia 3%.
Bonds, the next largest exposure, is split almost straight down the middle between strategic bond managers at 12.8% and investment grade corporate bonds at 12.2%.
In alternatives, the largest exposure is to infrastructure, which is 8.6%. Commercial property is at 4%, hedge funds at 3.5% and gold at 2%.
The fund managers hold 2% in real cash, with the rest going into a money market fund.
Thesis benchmarks the portfolio against the Private Investor FTSE Index. Over one, three and five years, the portfolio has consistently fallen short of the benchmark (see chart).
‘Over the past year there’s been a general de-risking’, Richards says. ‘We’re largely neutral on equities. That has moved down from a marginal overweight, otherwise we have been at the lowest weighting we can prescribe within bond assets within fixed interest.
‘Alternative assets have been consistently overweight. In terms of changes, the most significant one has been adding gold as part of the alternative assets exposure in March this year.
‘It was an insurance policy for clients’ portfolios heading into a year where we thought risks to bonds and equities were increasing due to rising interest rates and political tensions between Trump and North Korea. Now it’s more to do with the overvaluation of the US market’.
Changes to the alternative portion of the portfolio over the past year have meant the team has moved equity exposure across the pond.
Burniston says: ‘We’ve trimmed hedge funds, raised a little cash and taken off the hedge on our Japanese exposure. We’ve had a currency hedge for some time but don’t have confidence in maintaining a hedge at this time. Any further currency moves against sterling will be profitable to client portfolios.
‘We also reduced our UK equity exposure by just over 1%. We’ve put that in the US because it’s been highly valued for a while. The US pulling back, led by the sell-off of their tech companies, gave us the opportunity to increase US and dollar exposure’.
The duo have also increased the portfolio’s weighting to infrastructure, and cut their exposure to absolute return funds.
‘Too many are over-diversified, have too much equity beta and still rely on positive returns from equities to make any form of return.
‘As soon as you get a reversal in equity markets they fall, albeit to a lesser extent. They don’t give you that cushion for your portfolios. There are more than 200 funds in the sector. The odds of picking one that does what you want consistently are against us.’
Richards adds: ‘Our recent additions to the portfolio are Reckitt Benckiser, a defensive consumer company that makes brands like Nurofen. We like the defensive nature of low ticket, repeat, decent margin items. They’re less sensitive to cyclicality.
‘We’ve taken profits on Croda, a chemicals company, and QinetiQ, a defence company. QinetiQ only went into our model this time last year and has made 30%. We sold Croda outright at a profit.’