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MPS Investment Committee: Najib El-Rayyes, Rivers Capital

MPS Investment Committee: Najib El-Rayyes, Rivers Capital

Najib El-Rayyes, portfolio manager at Rivers Capital talks about how volatility is set to boost unloved value funds.

'When Rivers was founded we were conscious that we wanted our investment approach to reflect and adapt to the continually changing investment landscape.

As well as tactical risk adjustments, our model portfolio process allows us to adjust our allocation between passive and active funds dynamically. Research shows that there are distinct periods where active funds outperform passives and periods when active managers really struggle to keep up with their benchmarks. We believe that by assessing where we are in the market cycle and using our dynamic allocation strategy, we can both lower overall fees and seek out the best opportunities to increase returns. 

Volatility

After a strong year for most markets in 2017, and an encouraging start to 2018, investors were brought down to earth with a bump as market volatility increased and nearly all asset classes sold off.

Our models started 2018 defensively positioned, relative to their strategic asset allocation and were relatively well protected during the first quarter sell-off.

In April, with valuations looking more attractive, Rivers’ models rebalanced to a neutral strategic asset allocation. This position was held only until September when, with many developed equity markets close to peak valuations, the models readopted a cautious stance. We added ETFS Physical Gold and the Legal & General Sterling Corporate Bond fund, which held up well during the sell-off in the fourth quarter.

The decision to return to neutral after October’s sell off may have been premature, but ensured the portfolios fully benefited from the January 2019 rally. Our Balanced Model finished the year down 2%, ahead of nearly all individual asset classes.

 
Capital protection

At the heart of all our models is the idea that capital protection is paramount and that it is much easier to maintain performance over the long-term if we avoid the need to claw back large drawdowns.

Reallocation within our portfolios between our asset buckets is key to shifting our risk exposure. We segment our portfolios according to our classification system of anchors, enhancers and diversifiers. For example, in the September rebalancing of our Balanced fund we reduced risk by selling ‘enhancer’ assets (those with equity-like risk/returns) from 46% to 35% and reallocated to ‘anchors’ (more predictable lower risk assets) which rose from 30% to 41%.

At a fund level we reduced our exposure to passive UK equity funds and rebalanced into funds across the fixed income spectrum, for instance the BlackRock All Gilts Tracker, the Artemis Strategic Bond and Templeton Global Bond funds.

 
Our approach for 2019

Our tactical adjustments are not attempting to predict market movements but based primarily on risk management. Despite volatility, we expect overall market returns to be low but generally positive. Tactical adjustment will be key to meeting our portfolio targets.

In terms of passive/active we see this as the final stage of the business cycle and expect to maintain an exposure of 50%-60% to active funds. We also believe that volatility will be a boost to many previously unloved value funds. Growth and momentum have dominated the market over the last decade and traditional value stocks have themselves become too expensive. Any further global sell-off will open up value opportunities within a number of markets, particularly in Asia.

Closer to home, we also like the unloved European markets and specifically the Janus Henderson European Focus fund and at the more passive end, the First Trust Eurozone Alphadex fund.

Over 2019 we will likely increase our diversifier holdings in order to mitigate market risk. In 2018 we added to our position in Polar Capital’s Global Insurance fund and will look to initiate a position in JP Morgan’s Global Macro Opportunities fund as both should have a lower correlation to equity markets.

We remain cautiously optimistic for 2019 and although the spectre of volatility is always in the background, the opportunities it affords us means we can be more opportunistic and adventurous than we were able last year.'

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