Jonathan Webster-Smith, director & head of Brooks Macdonald's multi-asset team, explains why they are looking to Japan as Brexit looms.
'As a multi-asset team we look after just over £2 billion in assets, around £1.3 billion of which sits within our managed portfolio service (MPS) offerings.
In terms of our investment process, for each of our risk offerings, we start with a broad strategic asset allocation strategy and apply a tactical overlay to ensure that we consider the current circumstances within each of our different asset allocation sectors.
We generally aim to make small tactical moves over time, as we believe this mitigates downside risk for our clients. We then employ security-level selection strategies targeting each specific area of the market in order to determine which individual investments offer the best risk-adjusted returns.
We invest in both passive and active funds, although we have increased our exposure towards the latter post-Brexit, as we believe this will decrease the correlation of returns generated by companies within the UK market.
Given the strength of UK mid and small cap companies in 2017, we elected to reduce our UK mid and small cap exposure by up to 4% in medium and higher risk-level portfolios. We reinvested the proceeds of this trade into the European and Japanese markets.
We made this change as we expect the UK consumer backdrop to continue to deteriorate amid negative real wage growth, declining consumer sentiment and political uncertainty.
Meanwhile, we believe that domestic Japanese companies will outperform as a result of improving corporate governance and accelerating earnings growth.
At the lower risk levels, one of our biggest concerns involves the correlation of our bond and equity positions.
To this end, we switched some US high yield exposure into the Pimco Select UK Income fund, which provides greater diversification. Continuing this theme, we sold a convertible fund and moved the proceeds into a hedge fund that aims to provide returns that are uncorrelated with global equities.
To date, these changes have had positive effects on our portfolios, to both investments performing reasonably well and exhibiting reduced correlation to other holdings in our portfolios.
In terms of 2017 returns, the portfolios achieved: 6.2% at low risk, 13.06% at medium risk and 18.27% at high risk; all of these returns are gross of management fees, but net of underlying fund costs.'