What clients are asking

Our clients and their advisers ask us a lot of questions, and we thought it would be a good idea to share some of the more topical ones…

Client Question:

How do the upcoming interest rate decisions affect my portfolio?

Casterbridge Answer:

This week is unusually busy for central banks, with the Federal Reserve, the Bank of England (BoE) and the Bank of Japan (BoJ) all deciding on rates within a few days of each other, against a backdrop of the highest Treasury yields since the financial crisis. We are watching all three closely. Rather than reacting to any single headline, we remain vigilant to how these decisions affect our portfolios.

When it comes to Fixed Interest investments, such as Bonds, higher yields mean lower prices for existing holders, but also higher income available on offer for new money. A repricing of this scale is a timely reminder for us to revisit how sensitive our holdings are to changes in interest rates. We continue to benefit from our underweight position in fixed income although there will be a time when the yields on offer become relatively attractive.

For Equities, higher interest rates, and as such, higher discount rates typically weigh more heavily on longer-duration, growth-style equities than on value or short-duration cash flow businesses. We see the potential opportunities to pick up outstanding companies at a more reasonable price for our portfolios in due course.

We believe that appropriate diversification is especially important at this time and continue to proactively manage both risks and opportunities

In the case of currencies and commodities, diverging central bank paths (a possible Fed hike alongside a BoE that may hold, and a BoJ that may hike) can move sterling, the dollar and the yen meaningfully. Additionally, when interest rates are being driven higher by persistent inflation, and the underlying uncertainty adds to the case for gold at this time. In a vacuum however, higher rates make commodities relatively less attractive as they are non-yielding; but that would be a case of the tail wagging the dog at present.

Looking at the classical safe haven of cash, higher policy rates support the case for holding an appropriate allocation to cash and other short-dated instruments while volatility persists. When looking at mortgages, borrowing and gearing, we continue to be vigilant to the appropriate use of leverage across our investment universe, both on a structural basis (within alternatives for example) and for how our portfolio companies manage their borrowing.

In summary, we believe that appropriate diversification is especially important at this time and continue to proactively manage both risks and opportunities within our investment universe.