Quilter Cheviot's lead portfolio manager on their MPS team highlights the funds that worked for them in 2017.
'Synchronised global growth, low inflation, favourable financial conditions and higher corporate profits have supported risk assets throughout the course of 2017. Indeed, investors have enjoyed strong returns against a backdrop of remarkably low volatility, a trend demonstrated across the Quilter Cheviot Managed Portfolio Service (MPS) strategies, our model-based discretionary management service investing exclusively in funds.
With the economic cycle maturing, higher nominal GDP growth and a favourable interest rate environment should support two years of double-digit corporate profit growth. Equity valuations are above average, but still within ‘normal’ ranges.
Over the course of the past 12 months, our strategies have reflected this broadly constructive outlook, with a tactical bias towards equities. We have favoured international markets in particular, with North America, continental Europe and Japan being our preferred overweight allocations. We have also introduced a number of new holdings across these regions over the period.
The Henderson European Selected Opportunities and Baillie Gifford Japanese Income Growth funds have both been added as new ideas, with the iShares North American Equity Index fund also incorporated as broad-based, low-cost market exposure that complements our active US manager holdings.
These overweight positions contrast with our views on the UK, where we have maintained a neutral to marginally underweight equity allocation throughout 2017. With Brexit dominating the headlines, UK GDP growth of 1.5% is near the bottom of the league table, and while there is a clear distinction between the UK economy and stock market, our preferences have tended to lie elsewhere.
The Majedie UK Equity and Artemis Income funds constitute our joint-largest positions within the allocation, while at the other end of the market cap spectrum we retain a dedicated exposure to the River & Mercantile UK Equity Smaller Companies fund, a position that has served us well in 2017.
Within the strategies’ fixed interest exposure, we have maintained our preference for UK sovereign debt over credit, though we retain a cautious stance overall.
Bond markets seem to be heading into a period where central banks will be less supportive than they have been in recent years, although we still expect the adjustment process to be very gradual.
Political risks also remain numerous, which should provide ongoing support for conventional gilts. We are therefore maintaining our focus on quality and liquidity within our bond allocation, choosing actively-managed funds for the majority of our exposure following years of beta-driven gains.
The Allianz Gilt Yield fund remains our largest individual fixed interest position across the strategies, with the Pimco Global Investment Grade Credit and AXA US Short Duration High Yield Bond funds our preferred international holdings.
Across the alternatives spectrum we are currently allocating to a diverse range of absolute return strategies, with the Old Mutual Global Equity Absolute Return, Invesco Perpetual Global Targeted Returns and GAM Star Absolute Return Bond funds all components within the allocation, which we have marginally increased over the course of 2017. Elsewhere, commercial property remains a modest weighting, with the strategies’ exposure split between the Aberdeen UK Property and F&C Property Growth & Income funds.
Returns have been pleasing in recent times for investors, with our MPS balanced strategy on platform delivering a gross return of 9.1% over one year to the end of October.'