Jason Butler, chief investment officer at NW Brown Wealth Management, speaks about their models and how deal or no deal, there will be a Brexit bounce back.
Following the pull-back towards the end of last year, equity valuations are more reasonable although there are still areas of the market that look conspicuously expensive and likely to disappoint over the next few years, particularly US equities and long-dated government bonds.
In contrast, we are attracted to pockets of value and there is perhaps no greater example of value in the equity space than the UK stock market, where ratings seem overly pessimistic and fail to recognise the underlying health of the UK economy.
Our model portfolio service was established in 2013 with the intention of providing smaller clients with the same standard of investment management traditionally enjoyed by our bespoke clients. Six years on and we have over £150 million under management, spread across five actively managed risk-rated models, ranging from cautious through to adventurous.
Asset allocation reflects the macro thoughts of the firm’s main investment committee, while model portfolio construction and fund selection are dealt with by a separate committee.
When selecting funds, we look for evidence of a well thought out investment process that is applied consistently and in a disciplined manner. New funds must also complement our existing fund choices and combine to deliver a well-diversified portfolio – although we have a general bias towards the value style of investment. We always meet the manager and aim to form a good, long-term working relationship with them, enabling us to gain a greater understanding of what is going on ‘beneath the bonnet’.
The asset allocation for our Risk 6 model shows our overwhelming preference for equities, which we believe will deliver better long-term results for clients compared to the other traditional asset classes. Indeed, where they are able to do so, we encourage our clients to adopt a long-term mindset with a willingness to ride out volatility. We believe this sets us apart from the short-termism that increasingly dominates our industry. The other noticeable feature is the absence of absolute return, alternatives and hedge funds. This reflects our preference to keep things simple and transparent.
In the current climate we feel that investment in longer-dated bonds carries an unacceptably high level of risk, and so we instead make use of bond funds that have a bias towards short duration, such as Invesco Perpetual Corporate Bond (managed by Paul Causer, pictured) and M&G Optimal Income. In this part of our portfolios we have also built in some protection against inflation.
However, given the very long duration of many UK index-linked bonds, we have used a low cost global fund to achieve this.
Despite the doom mongers who predict a dire post-Brexit outlook for the UK, we remain confident that domestic companies will rise to whatever challenges lie ahead, and have recently increased our exposure to the UK through the Franklin Templeton and Merian UK Mid Cap funds. This increase was funded by a modest reduction to overseas markets, which have stood us in good stead over the last couple of years.
In overseas markets we prefer to gain exposure through global, general funds, leaving it to the managers of those funds to allocate between markets, but keeping a careful eye on overall weightings. The inclusion of income funds, such as Newton Global Income and Fidelity Global Dividend, reflects our expectation that the climate in future will be one of lower returns where income will become more valuable.
An area we regard as likely to recover from recent weakness and do well over the longer term is emerging markets, where we have increased exposure by adding specific funds to our higher risk models.
In the coming months our main focus is likely to be on further increasing exposure to the UK, as we anticipate it will return to favour amongst international asset allocators once the post-Brexit uncertainty has been resolved.