Simon Doherty , lead portfolio manager at Quilter Cheviot reveals that as a no-deal Brexit risk recedes, UK equities appeal.
'Equity markets have started 2019 in fine fettle, rebounding sharply from their festive woes. Supportive central bank rhetoric, cautious optimism surrounding the US-China trade discussions and reassuring company updates have helped to drive momentum and calm the frayed nerves apparent during the fourth quarter of 2018.
Stocks aside, other asset classes have also performed well, ensuring investors with a range of differing risk profiles have enjoyed the rally year-to-date.
Against this backdrop we have been active throughout 2019, implementing tactical changes to the MPS and MPS Index (IDX) strategies across a number of different areas.
An active year
In January, we reduced the strategies’ commercial property allocations, retaining the proceeds temporarily in cash. As one of the few asset classes to deliver a positive absolute return in 2018, we felt this was a timely opportunity to trim exposure to UK ‘bricks and mortar’ through the sale of the Aberdeen UK Property Feeder Unit trust.
Later that month, we unwound the strategies’ allocation to US Treasuries. Having taken profits from the strategies’ US and Japanese equity allocations in late October and early November, we had introduced the holding in the Vanguard US Government Bond Index fund to provide additional diversification within the strategies, while also avoiding repatriating these funds into sterling. Having done its job effectively during the final two months of 2018, and with the risks of a ‘no-deal’ Brexit receding, we felt it was time to move on from the position.
In March, we used the proceeds from these sales to increase the strategies’ exposure to UK equities, adding to our existing holdings as well as selectively introducing a new idea focused on the smaller segment of the domestic market – the Aberforth UK Small Companies fund.
While cognisant of ongoing political uncertainty, our view was that a potential closing of the ‘Brexit discount’ on UK equities could see a further rally in UK stocks, particularly if overseas investors take a more positive view of sterling assets.
The valuation argument was also attractive, with the income gap between UK shares and government bonds at a multi-decade high. A dividend yield north of 4% on the FTSE 100 compares with a redemption yield of approximately 1.2% on the 10-year gilt. In our view, this seems too extreme, supporting the decision to neutralise the underweight position to the home market.
The bright side
We continue to see the backdrop for investors as broadly positive overall. The rate of global economic growth has eased, but fears concerning recession have abated, with consumer-related data, such as employment rates and wage growth, remaining robust across the world.
With market expectations managed down aggressively in advance, corporate earnings have provided further support for equities in recent weeks, with improved guidance from approximately a third of companies (thus far) adding impetus.
On a 10-year average view, equity valuations remain reasonable. However, after the V-shaped recovery we have seen from December’s nadir, we expect markets to pause for breath in the short term.
Within the context of each of their respective risk profiles, portfolios remain tactically tilted in favour of opportunities within equity markets, particularly across international regions. For an investor within our MPS Balanced strategy, this equates to an allocation of approximately 38.5% to international equities, 30% to UK equities, 14% to fixed interest holdings, 8.5% to absolute return and hedge funds, 2% in commercial property and the balance held in cash.
The Quilter Cheviot MPS is a model-based discretionary management service investing exclusively in funds. Since pioneering the development of an MPS in 2001, we have continued to expand our range of investment strategies to provide clients of financial advisers with access to a straightforward, cost-effective way to benefit from our investment expertise, process and resources.
We offer a broad range of strategies, each actively managed, independently risk-mapped and designed to deliver a different investment objective. The strategies are available through our own nominee arrangements, or alternatively across a carefully selected range of platform providers.'