Oliver Stone, head of research at Fairstone Private Wealth, discusses how their core range targets defensive-minded investors.
Fairstone Private Wealth manages over £400 million of discretionary assets in risk-targeted, multi-asset, multi-manager portfolios on behalf of Fairstone Group’s advisers, with our oldest ‘Core’ range dating back more than 10 years to October 2008.
We have adapted the Core range to deliberately target a more defensively-minded client segment through the use of highly flexible tactical allocation and alternative asset classes. The range works in a complementary fashion in conjunction with more traditionally invested portfolio mandates; acknowledging the fact that behaviourally, clients enjoy upside volatility much more than its downside equivalent. These portfolios have historically delivered a track record of lower volatility and maximum drawdown versus peers.
The current management team gained sole responsibility for the model portfolio service (MPS) in 2017, and while we very much retain its core tenets of downside risk focus through genuine diversification, differentiated holdings and robust risk management to align with client goals, we have had an opportunity to subsequently build on this foundational investment approach.
Our strategic asset allocation is driven by long-term, 10-year forecasts around which we tactically asset allocate. We do this using a relative valuation model which starts by tracking inflation-adjusted yields of all viable asset classes through time, alongside a more granular evaluation of sub-asset class, regional and style valuations.
This points us towards any potential inter-asset class valuation discrepancies of interest, leading to further analysis. We examine a wide range of global macroeconomic data to establish the direction of travel in particular regions, paying particular attention to items such as purchasing managers’ indices (PMIs), money supply figures and other such ‘leading’ indicators that have historically exhibited some predictive power.
Within this part of the framework, a qualitative discussion of regions’ geopolitical situations is had. While no investment decision can be solely based on such discussions given their inherent complexity and uncertainty, they may serve to handily corroborate or contradict our initial valuation work, acting as a check and balance.
Alternative asset classes
We recognise that in this period of ongoing extraordinary global monetary and fiscal policy, asset class valuations may not be as they seem. Bond market fundamentals have been heavily distorted through asset purchase programs, a hunt for yield and regulatory changes, whilst we see equity markets now driven by algorithmic trading and enormous passive investment flows.
We feel that the inclusion of both lower and higher risk alternatives within model portfolios is important from a risk dampening perspective; providing an idiosyncratic, negatively or uncorrelated risk/return profile with an element of tail risk ‘optionality’.
For example, we hold an allocation in precious metals through Merian Gold & Silver. The fund dynamically shifts between gold and silver bullion and equity to take advantage of perceived opportunities whilst being able to protect on the downside in relative terms.
The vagaries of platforms and regulatory issues mean it is difficult to justify holding and trading physical commodity vehicles without significant incurring time costs and general fees. This fund is unique as far as we know in actively allocating to both physical commodities (through closed-ended instruments) and listed equities.
At the strategic, ‘neutral’ point, a typical balanced mandate will contain 57% higher risk assets (equity, commodities and higher risk alternatives) and 43% lower risk assets (fixed income, commercial property, lower risk alternatives and cash).
Across our various mandates we are currently invested at this neutral point, albeit with overweight positions in alternatives and commodities (expressed through precious metals) to provide elements of diversification we believe are difficult to find in traditional asset classes at this time.
We believe these positions will ward against sharp market reversals in both equities and bonds should they occur, while providing a differentiated risk/return stream; serving to dampen client losses.