This month Neil Birrell, Premier Miton’s Chief Investment Officer and lead manager of the Diversified fund range, looks at why it’s important to be focused when it comes to asset allocation, not just picking an asset class and notes that currency exposure is high on the agenda again.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
In favour: staying focused
At the start of each quarter we publish a quarterly round up for the Diversified funds, where the investment team discuss what they have been doing within the portfolios they manage across the different asset classes, along with an outlook for what they see coming up.
For some time now, in my overview section (and in many other places) I have been talking about the huge dispersions we are seeing within asset classes and the risks and opportunities that are being produced. On reading the thoughts of the team in the draft of this quarter’s note, it struck me yet again, that which bit of the asset class we are in, is more important than being in the asset class itself.
In this note in May, we told of how high yield bonds were out of favour; we much preferred the risk / return profile investment grade offers over high yield. There has become en greater dispersion in the bond market, specifically within the world of US high yield, where investors have chased the best quality bonds (BB) and eschewed the worst quality (CCC) which have moved out to a premium or “spread” of around 9.5% over the equivalent Treasury bond, which compares to less than 2% for BB bonds. All of this is happening at relatively high interest rates as well! So, it’s not just investment grade over high yield, its which bit of high yield that’s important as fears over refinancing and defaults rise.
If you read our notes regularly, you will be well aware of us favouring medium and small companies over large within equities. That is beginning to work nicely in the very short term, smaller companies are performing well globally and the very largest companies are doing the opposite. However, we think small company outperformance should be a long term phenomena. Due to the valuation risk that has been rising in NVIDIA recently, we have been reducing the holding and sold out of the remaining modest exposure on 17 July. We do still hold Microsoft and other technology companies, but none on a big scale and we remain very diversified by sector and geography. Although, having said that, we retain a significant exposure to UK equities, particularly, guess what, small and medium sized UK equities! Again, in this note and elsewhere, we have told that story a number of times, which is now supplemented by, of all things, domestic political stability.
I would not advocate making investments based on short term moves, but it is interesting to note how quickly things can change, the chart below shows the Russell 2000 Index (US small companies) and the Magnificent 7 over 1 month to 17 July. Obviously, this could reverse, but it is worth noting.
Source: Bloomberg 17.06.24 – 17.07.24. Past performance is not a reliable indicator of future returns.
It’s the same story in property companies, just in the office sector over the last quarter, London office and workspace specialists were notably strong, (Helical delivered total returns of +20%, Workspace +15.9% and Derwent London +7.1%) as robust occupier demand for quality space resulted in strong rental growth, with shares unsurprisingly outperforming their European counterparts; Paris office specialist Gecina fell 10% and was the worst performer over the quarter as increased support for far right political parties resulted in concerns over potential impacts on the French economy.
I could go on, but I’m sure you get the picture, in my view, it’s what you hold within the asset class that is going to be the key to performance, not the asset class itself.
Out of favour: currencies!!
We hedge the currency exposure across the funds in a systematic way against the US Dollar and the Euro, aiming to be fully hedged when Sterling is at extreme lows and unhedged when Sterling is high. However, those are subjective decisions, hence we use different currency points to adjust the level of hedging.
Through the period around the disastrous mini-budget under Prime Minister Truss, Sterling collapsed and there was talk of it reaching parity against both the Dollar and Euro, a real extreme. That was a long time ago and the situation in the UK is now very different, as it is elsewhere. Our conundrum is; should we be rebasing our view of what are the extremes of valuation for Sterling now?
It’s not so much that “currencies” themselves are out of favour, more the decision we face in deciding what to do with the FX exposure in the funds. It’s an important decision, but a tough one.
