Holding a majority weighting in equities and a lesser equal split between alternatives and fixed income, the Waverton Cautious Portfolio looks to drive sustained returns while protecting against market volatility.
Although the portfolio is intended for investors with a medium attitude to risk, ‘we still see value in equity markets,’ John Bellamy, Waverton head of managed portfolio service says.
With an overweight exposure to US equities in comparison with the majority of its peers, the cautious fund sees considerable value in this holding.
‘[US equities] is currently the best market to be in and US currency is also strong,’ Bellamy notes. ‘In the current climate, I don’t see a reason to allocate away from US equities. The majority of these companies are outperforming on revenue and earnings per share.’
Despite being overweight its peers in US equities, Bellamy notes the fund remains underweight the MSCI World index in this area.
‘The US represents more than 60% of this index. Although we have been (and remain) positive on the US market we are structurally underweight as, from a portfolio construction point of view, we would consider 60% in one market (however large) a little too rich for private clients.’
Considering the fund’s non-UK weighting, the cautious portfolio has benefited from global opportunities, Bellamy says. He notes ‘global investment comes with currency risk’ that has been beneficial to the fund.
This is in addition to the fact US equities have been opportunistic since Brexit, Bellamy says.
However, a blind eye cannot be turned to the potential effect of the UK’s exit from the EU. With Brexit negotiations seeming to be veering towards binary outcomes, levels of volatility in sterling have risen, Bellamy says.
To protect the fund, Waverton has introduced a partial currency hedge in the run-up to Brexit. This will work to negate the effect of a strong bounce in sterling in the event of a ‘soft Brexit’.
‘Within our MPS portfolios we do hedge this risk if we feel it is appropriate to do so,’ says Bellamy. ‘We removed all our hedges just prior to the Brexit vote and this decision has proved beneficial to the portfolios as GBP weakened.
‘In the past few weeks we have added back a partial currency hedge as the Brexit outcome is now looking rather binary.
‘If we do get a soft Brexit, the translation effect of a strong sterling would hurt us so we have an option position in GBP/USD that would mitigate those losses. Conversely, while a hard Brexit may be bad for the UK market, sterling will likely depreciate, giving us a translation benefit for our global portfolios.’
More broadly, however, Bellamy says: ‘Although volatility is likely to increase, with a return to recessionary conditions, indicators suggest we are not there yet.’
Waverton will be launching a real assets fund, to secure additional returns for investors. Notably, Waverton’s actual allocation to alternatives in its cautious portfolio is far greater than what it set out to allocate (see chart).
With a projected yield of 3.5%, Waverton’s additional fund splits the cautious portfolio’s alternatives fund into two, the Waverton Absolute Return fund and the Waverton Real Assets fund, creating a fifth asset class.
‘With regards to the alternatives exposure in our portfolios, we are splitting the current fund in two. Waverton Absolute Return will target Libor +3% with low volatility and limited correlation to equities or bonds. Waverton Real Assets will target CPI + 4% with volatility of around 10-12%,’ Bellamy says.
Low volatility will be achieved by investing in a diversified portfolio of ‘physical’ asset-backed businesses and cashflow streams including property and infrastructure, social housing and student accommodation, among others, Bellamy says.
Discussing why the manager has introduced this fund, Bellamy says: ‘Different clients want different exposure to real assets and absolute return. This gives us an extra lever to accommodate to clients’ risk return profiles.’