Paul Sheehan, investment manager at WHIreland explains why he is favouring equities and alternative assets right now.
We would characterise our current stance as being guardedly optimistic. The world economy is currently in a transition from ultra-low interest rates and excess liquidity to more normalised levels. The wind down of quantitative easing (QE) in the US and Europe is the most formal manifestation of this change, with increased volatility the most potent outcome.
We feel, however, that the peak in interest rates and inflation will be much lower than in previous cycles. As such, most financial assets can command higher valuations than in periods which exhibit high inflation and elevated costs of capital and implied risk.
Overall, we are favouring equities and are generally underweight government bonds, as the latter offers less attractive real returns. We are complementing these assets with exposures to a range of alternative assets that provide positive, albeit lower correlated, returns.
All that glitters
We were proactive in buying gold a number of years ago, and it has performed well in the recent pull back in the markets. Other alternatives include the F&C Commercial Property Trust, and the HICL Infrastructure, Troy Trojan (managed by Sebastian Lyon, pictured) and Newton Real Return funds.
We recently added the Polar Capital Global Convertibles fund (managed by AAA-rated David Keetley and Stephen McCormick) to our strategies, being a hybrid equity/bond vehicle with an above average yield. With our choices in alternative investments, we are prepared to bet against the consensus.
In the autumn we added emerging equities, as these markets were offering long-term growth and potentially high returns due to bear market valuations. We also added UK equities recently, as we think this is an unloved asset class with a substantial yield that could recover sharply once the Brexit discount unwinds from valuations.
We funded these purchases by reductions in European and Japanese equities, as these are markets that have benefitted from QE, which is now being withdrawn.
We have five main models, each with an attendant benchmark and risk parameters. These are: conservative, cautious, balanced, moderately adventurous and adventurous. The standard benchmark is the MSCI WMA investor index.
Analysis and research for the portfolios are carried out by four committees: asset allocation, portfolio construction (PCC), stock selection and collectives. Research combines both top-down elements (macro-economics, currencies, interest rates, liquidity, inflation and demographics) with bottom-up inputs (funds, manager track record, fees, financial structures, risk, stock and sector exposures, and style biases). These inputs are co-ordinated by the PCC, which produces the template for the model portfolios.
Four key tenets underpinning our philosophy:• Asset allocation is a key driver of portfolio performance.• An active approach is applied to asset allocation and manager selection.• We are not constrained by investment style, and our decisions are based on fundamental analysis and research.• Intelligent management of risk is a key component of portfolio design.
Investment trust & sector Three-year NAV total return
F&C Commercial Property Trust 27.6%
Property Direct ― UK sector 32.1%
HICL Infrastructure 31.8%
Infrastructure sector 36.1%
Fund & sector Three-year total return
Troy Trojan 13.6%
Citywire Absolute Return sector 11.7%
Polar Capital Global Convertible 16.1%
Citywire Convertibles Global sector 10.6%