Julian Menges, Head of Hardy Managed Portfolios
We completed our latest rebalance of Hardy portfolios last week. In my pre-rebalance preview I highlighted we are increasingly concerned about the growing risk of inflation. It is what western central banks want but, once released, it can be a difficult beast to control and can have unintended consequences.
This rebalance reduces our tactical overweight cash and have tilted the portfolios slightly more to “value”. These changes will help portfolios as the economy recovers out of the pandemic and also benefit portfolios should inflation start to rise on a sustained basis. We have introduced 3 new holdings.
UK – We have sold Liontrust Special Situations to reinvest partially into the Liontrust UK Smaller Companies, which is a more focused way to get exposure to the recovery in the UK economy. In addition we have sold Royal London Sustainable Leaders to reinvest into Artemis UK Select. This reduces exposure to the in-vogue highly-rated sustainable areas of the economy into cheaper and more unloved areas, including mid-cap companies.
Europe – We have sold Man GLG European Growth to reinvest into Lightman European. Again, this reduces exposure to more predictable but more highly-rated companies, which have done well during the uncertainty of the pandemic, and increases exposure to more cyclical companies. Many of these have struggled recently but are starting from much lower valuations, which gives greater potential for outperformance going forward.
Let me give an example of the sort of insightful discussing we are having and where two respectable mangers are finding contrasting opportunities. I was recently on a call with a leading US thematics fund manager and they were extolling the virtues of many of the exciting new companies they were finding (in areas which include healthcare, lifestyle changes, digitalisation, automation, clean economy etc). I asked about a well known US EV manufacturer; the fund manager loves the company, can see great prospects and is not put off by its high valuation.
The following day I was on a call with the manager of the Lightman European fund (as part of our due diligence in reviewing the fund). I asked him about the same company. He also likes the company but cannot justify the high price. He much prefers and invests in a more traditional European auto manufacturer, which he believes is at a much more reasonable price relative to the company’s earnings and where he can see at least double digits earnings growth for the next 2 years (EU Green New Deal, new subscription services).
Do we continue to invest in the companies of tomorrow, with their likely higher growth but higher valuations, or some of the more unloved cyclical companies, which are evolving in this changing environment and so seen as “higher risk” but which are (mostly) on much better starting valuations. This is why the outlook for inflation is so important as it has such a key role in determining valuations, irrespective of growth rates.
In summary, we have invested about 40% of our cash and are holding some back on a short-term tactical basis, on alert for possible further equity weakness over the next month or so.
Important Information
This update is for information only and it is important to remember that any information does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. The views and opinions within this document are those of Casterbridge Wealth at time of writing and may change without notice. They should not be viewed as indicating any guarantee of return from an investment managed by Casterbridge Wealth nor as advice of any nature. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
