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Asset allocation and investment strategy update – July 2016

Ben Seager-Scott, Director of Investment Strategy & Research gives an update on our current investment thinking and runs through the latest changes from our recent Asset Allocation Committee meeting.

Our overall view

Although we don't think the result of the UK’s EU referendum will ultimately have a major effect on fundamental economic prospects in the long-term, we suspect that it may have brought forward the onset of a downturn in the UK and Europe, acting as a catalyst rather than a cause. Adding to this are the broader challenges faced by the US economy that we have been highlighting for some time.

With the recent rallying of stock markets on both sides of the Atlantic, it appears equity markets are currently sending contradictory signals relative to other asset classes such as bonds and property, which are now showing clear warning signs over the global economic outlook.

These gathering economic storm clouds have been integral to our investment strategy over the last year. We have taken steps to de-risk our portfolios over the last year or so. We have been cautiously positioned, in particular favouring holdings in US and UK government bonds, which have benefited from recent movements as bond markets have moved closer to our way of thinking.

Response to the devaluation of UK property funds

With the recent volatility in the UK property market we have reduced the exposure to the property sector in our asset allocations, to reflect the downward revaluations in many property funds and the positions we hold in them. We are not suggesting investors sell their property holdings, but rather they give consideration to not topping up these investments to rebalance their portfolios.

An increase in physical gold

We have increased our allocation to physical gold, which is typically not highly correlated to equities or bonds and so provides good diversification benefits. Gold may also be sought as a store of wealth in future, particularly if governments are forced to begin competitive global currency devaluation and replace ineffective monetary stimulus programmes such as quantitative easing with additional fiscal stimulus.

Less exposure to UK gilts

We have been positive on UK government bonds for some time, believing that the Bank of England was unlikely to hike interest rates as quickly as much of the market thought. Market expectations have now fallen significantly with the Bank of England Governor, Mark Carney, clearly signalling a path of easing monetary policy.

As a result, we have opted to take some profit from these positions. Despite this move, we do keep significant exposure to the asset class in our core investment strategy (alongside US Treasuries), since these assets could continue to provide further returns in the event of an economic downturn manifesting.

Video – an insight into our investment strategy

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