Key Points:
- The discipline of our portfolio construction is providing real support to fund values. If you build something properly it will be durable in ways you didn’t expect.
- We’ve planned for an environment of rising interest rates increasing our government bonds whilst reducing our exposure to corporate bonds. We have also added higher yield debt, that has default risk attached to it, but is relatively well capitalised.
- We retain our global themes of ‘Fundamental Technology’, ‘Health Care’ and Emerging Markets.
- We wisely, it seems, raised cash as we saw risk on the downside in expensive growth assets and are now returning with strong long-term holdings, cash on portfolios down to ‘fully invested’ levels.
- We have added to our ‘shovel technology’ theme in the most literal sense, picking up a position in agricultural machinery- helping farmers use less expensive fertiliser and seed.
- There are continued short term risk considerations but after the pull back we have seen in asset values we can justify the prices we’re paying for the holdings.
Investing at the right price for the long term
The discipline of our portfolio construction is providing real support to fund values. If you build something properly it will be durable in ways you didn’t expect. However, this is a snapshot of our thinking and plans for an environment of rising interest rates, the blunt instrument central banks use to tackle obdurate inflation, in a tight employment market (high employment is bad now?) We have increased government bonds- the traditional risk-free asset. We have reduced our exposure to corporate bonds as they were priced very similarly to government debt without the ‘lender of last resort’ backing of central banks.
As part of our central macro view of higher interest rates we have added higher yield debt, that has default risk attached to it- however these borrowers are relatively well capitalised. The risk is less prominent with rising interest rates because the yield (percentage income) is higher, the proportion a 0.5% rate rise makes up, is lower- this is called duration risk (by all means, please google it- particularly as we are Alphabet shareholders- every little bit helps). This smaller bond exposure is invested for continued inflation, rising interest rates and economic growth as COVID and the Ukrainian invasion by Russia concludes over time (hopefully soon).
We retain our global themes of:
- ‘Fundamental Technology’ (Firms that sell the shovels to the technology gold prospectors).
- ‘Health Care’, that includes supported accommodation, surgical technology as well as large pharmaceutical companies.
- ‘Emerging Markets’ for their long-term economic growth driven by their positive demographics of having such a high proportion of their populations below the age of 30.
What we’ve been doing with portfolios
Having, wisely it seems, raised some cash, as we saw risk on the downside in expensive growth assets, we are now returning with strong long-term holdings, the cash on portfolios is down to a level that is considered ‘fully invested’. So how did we get there? We exited one of our emerging markets (EM) equity holdings in February, so we have, thankfully, been underweight- the replacement is an Asia Pacific fund with a focus on quality growth and an overweight to India that will sit alongside our more adventurous EM holding that has some exposure to frontier markets.
We have added to our ‘shovel technology’ theme in the most literal sense, picking up a position in agricultural machinery- helping farmers use less of the expensive fertiliser and seed. The challenge of the Ukrainian blockade is accelerating the uptake of farming technology. We will add to our financials (Banks, Insurance Companies, etc) as they tend to prosper in rising interest rate environment. The area of specialist lending and private equity continues to be attractive within our ‘Alternative’ allocation and direct equities.
Economic opportunities
There is continued short term risk considerations but after the pull back we have seen in asset values we can justify the prices you’re paying for the holdings- but it will be volatile from one shocking news headline to another- but post COVID/Ukraine there is economic opportunity for which you are well positioned.
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.
