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MPS Investment Committee: Sam Grant-Dalton, Close Brothers Asset Management

MPS Investment Committee: Sam Grant-Dalton, Close Brothers Asset Management

 Sam Grant-Dalton, investment manager at Close Bothers Asset Management discusses the crucial role of fixed interest and alternatives.

'Last year was a difficult one for investors across most asset classes, but we remain cautiously positive about the outlook for 2019. The period was characterised by significant volatility – with daily gyrations across asset classes, sectors and stocks, more than four times that which we experienced in 2017.

Policy concerns over central bank tightening and global trade wars, have weighed heavily on sentiment and have further exacerbated the typical ‘end of cycle’ concerns. However, earnings growth has remained strong everywhere. Given that markets have fallen while earnings have been rising, this means that the price we pay for these earnings has come down dramatically.

We have continued to follow our strategy of broad diversification across asset classes and believe that these volatile markets also favour active stock selection, as picking winners and avoiding losers becomes a more important driver of performance.

Taking our Balanced portfolio for example, we are currently invested 66% in equities, 22% in fixed interest, 8% in alternatives and 4% in cash. This is slightly overweight equities, underweight fixed interest and neutral alternatives relative to our long-term strategic asset allocation.

Having previously discussed our equity managers, it is important to reflect on the crucial role that fixed interest and alternatives managers can play in delivering a combination of income, capital protection and total returns that are not driven by the wider equity market.

Fixed interest
Within fixed interest, given the relatively unattractive yields available, we are underweight government bonds, but maintain an allocation to help provide some protection.  We continue to have a preference for higher quality corporate bond focused managers as well as dynamic bond managers who can mitigate their interest rate risk.

For instance, the ChurchHouse Investment Grade Fixed Interest fund, managed by Jeremy Wharton (pictured), has outperformed the sterling corporate bond market by 1% this year; principally by protecting capital as corporate bond spreads have widened.

Bond selection is also central for Azhar Hussain who manages the Royal London Short Duration High Yield fund.

Investing in bonds with a maturity of less than two years helps reduce risk without significantly sacrificing yield, such that the fund has historically produced two thirds of the income of the high yield market but with only half the volatility.

 The TwentyFour Monument Bond fund invests in European asset-backed securities, with a focus on mortgage-backed securities. While many remember this asset class in relation to the mortgage crisis in the United States, the default rates in Europe are very low and have stable cash flows, which are positively correlated with rising interest rates.

Conscious of the wider market volatility, we have been adding to our alternatives exposure this year.

Finding managers who are genuinely uncorrelated to the wider equity and fixed interest markets, and who have strong processes is tough. On the one hand funds perform well, but lack long track records and on the other hand funds with longer track records can be expensive or illiquid.

We have invested in the daily dealing and sensibly priced BMO Global Equity Market Neutral fund which isolates factors such as value, size, momentum and low volatility, which are backed up by academic research.

Targeting a return of cash plus 7% with a volatility of 10%, the fund has zero correlation to equities and less than 0.2% to fixed interest markets.

Overall while volatility is likely to remain a feature of markets next year, attractive valuations and a reduction in policy risk could lead markets higher than today’s levels.'

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