We have been working hard across the group to review our strategic asset allocation (SAA), the investment decisions we make on a two- to five-year view that are core to our investment process. Since the winter of 2022, we have been at a historically low allocation to fixed interest (bonds) investments, particularly versus our peers, of 20% within a medium-risk long-term investor’s portfolio. However, we have held a fixed interest underweight of 17.5% within our ‘tactical’ adjustment for so long that it has become normalised. This is because current levels of debt in the global economy are higher now than following the Global Financial Crisis in 2009. We are therefore considering increasing the duration of our fixed interest holdings, as bonds with a longer time to maturity are more sensitive to interest rate changes. This move would give us some comfort that if there are more aggressive rate cuts than three cuts of 25 basis points each (0.75% in total) over this next year, the increase in value in our limited bond exposure will be passed on to clients.
We are researching the opportunities in direct UK Gilts (no currency risk for GBP clients) and collective investment vehicles (OEICs and ETFs) that could give clients that hedge against interest rates and inflation falling more aggressively. That said, following the recent jobs report, which came in well ahead of expectations, and stronger-than-expected inflation from the US, we won’t be ready to make that commitment until the second quarter of this year. Inflation hasn’t gone away, yet.
This means that we have further funds to commit towards thematic equity or our Alternative asset allocation. Alongside our long-term ‘fundamental technology’ theme, we are keen for clients to benefit from the energy transition and healthcare as part of our integrated approach to ESG (environmental, social and governance). However, finding companies and funds that do so in a way that is investable requires a lot of research. We have been undertaking that research for some time, and have found companies with strong balance sheets and a record of positive returns. Finding those funds and companies required us to look abroad, so we have chosen to further reduce our UK equity exposure in favour of greater exposure to overseas markets, particularly the US. We will retain UK equity exposure as part of the hedging of currency risk, and the UK equity market still provides a healthy dividend that the US, Emerging Markets (EM) and Japan traditionally do not.
However, as we remain mindful of the shorter-term volatility in EM – particularly within China – we have a larger exposure to lower-risk income-producing assets in EM equities. Our Alternatives investments have good yield characteristics, and this, as well as the rising yield in fixed income, makes it now easier to look at growth-focused companies in the US and other places to add that important exposure to healthcare and the energy transition, without damaging income generation.
Dave Winckler (Head of Collective Research), Will de Baer (Bespoke Investment Chair), Anna Saunders (Direct Equity Research) and their teams have completed the initial review of the sectors and have a list of securities we can add to our SAA models. We will be finalising our selection at our next quarterly ‘Deep Dive’ meeting, where the entire investment group come together to settle our ‘House View’ on stock selection after the six-monthly SAA has been agreed.
Our investment process ensures that good ideas are shared for the benefit of all our investors. So, if the collective team that drives our Hardy, Boldwood and Strategic Impact products have a recommendation that suits the objectives of our Bespoke investment clients, we will often co-invest. Therefore, our intention to reduce bond exposure (while increasing bond duration), to increase exposure to equity/alternatives focused on the themes of energy transition and healthcare, and to make a geographical adjustment by reducing UK equities in favour of overseas equities (particularly the US), forms our longer-term view that will be discussed again in six months at our next SAA meeting.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on 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.
