In this update Julian Menges, Lead Portfolio Manager of the Casterbridge Hardy Managed Portfolios, highlights the changes he and the team have made to the Tactical Asset Allocation in responses to the War in Ukraine and the market worries surrounding inflation.
The last few weeks have seen markets focus on two key issues: rising inflation and increasing geopolitical tension. It appears that both are likely to continue to dominate headlines for a while yet.
While some politicians have been quick to blame the recent rise in inflation on the conflict in Ukraine, the seeds were sown many years before. Governments have been running massive fiscal deficits and at the same time central banks have been over-stimulating with easy monetary policies for too long. So inflation was already stirring due to strong demand and supply constraints as we started to leave the Covid pandemic in the rear view mirror, and now we have the conflict in Ukraine. Russia controls around 15% of global commodities and so being cut off from trade with the West is further exacerbating inflationary pressures.
We wrote in March about how we had sold all UK corporate bonds on a short-term tactical basis on concerns about this rising inflation. We rotated some of the proceeds into US Treasuries, invested some into new Alternative funds and held some in cash.
We have written previously that, as inflationary pressures increased, monetary policy tightened and geopolitical tensions rose, we should expect volatility to increase. We are now seeing this.
We have taken advantage of the recent falls in bond prices and equities to re-enter into corporate bonds and top up equity positions. Our bond exposure is being split between a low duration high quality UK corporate bond fund with yields over 3%, and a US short duration high yield fund with yields close to 6%. While we still have concerns about real yields in bond markets, we are mindful that bonds can still play an important diversification role in portfolios and the recent increase in yields provides us with the opportunity to re-enter the market. (This move is being made for all but our highest risk portfolios, where the focus remains very much on equities).
We have also invested our remaining cash balance into equities, predominantly US equities. The Tech-heavy Nasdaq has fallen about 25% this year, and the broader S&P500 around 15%. While there is a lot of negative news about the increasing cost of living and rising interest rates which is unsettling markets, there are also reassuring factors such as the stable housing market, high savings rates and low unemployment.
Performance & Positioning
We have received some very complimentary feedback from Advisers recently who have commented on our strong performance relative to many of our peers. While we were early into the inflation and “value” trade, we stuck to our views and it has been coming through as we are now all seeing. Timing a significant change in trend is always difficult, but experience and evidence indicated that it was the right approach for us to take.
At present, our portfolios contain a balance of growth and value funds. Our growth funds continue to find opportunities in sectors such as Technology and Healthcare, while our cyclical / value funds continue to view sectors such as Energy and Mining as attractive, on low valuations and attractive yields. This may well change over the coming quarters as further evidence on growth and inflation develops, but this is the appropriate balance as we navigate the next few months which may prove more volatile than recently.
For Income portfolios, where we aim to target specific levels of yield, we have made no changes. They already have a bias to our preferred asset class equities and within that to our preferred value style. While there is a potentially slightly greater style / concentration risk, we would not be surprised to see them continue to outperform our growth portfolios if inflation continues to remain higher for longer.
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions on the basis of it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and 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.