Our Portfolio Positioning

A new market cycle

Our flagship portfolio positioning

We have made two key calls heading into the second half of the year: increasing exposure to US investment grade bonds (hedged) and European minimum volatility stocks.

Our increased US investment grade (hedged) bond exposure has been funded by a reduction in our exposure to European and UK investment grade bonds. This slightly increases our sensitivity to interest rate changes, as we have stronger conviction that Fed rates have peaked and we’re positioning for falling bond yields in the US.

Our analysis suggests that the outlook for continued outperformance of Eurozone equities is likely to become more challenged. However, there are risks in the US market given stretched valuations and our belief that expectations of Fed rate cuts are too optimistic. We see European minimum volatility stocks as a way of increasing our exposure to the Eurozone and allowing us to diversify away from the US, while keeping our slightly reduced exposure to equities unchanged. By investing broadly into Europe (rather than just Eurozone equities), we are positioned capture any continued upside in Eurozone equities while mitigating the risks of a downturn through wider regional diversification and a focus on defensive sectors and companies.

US rates are peaking

We increase our US investment grade bond (hedged) exposure to neutral and maintain our preference for US Treasuries (hedged) on expectations of Fed rates peaking.

Heightened US credit default risks

We maintain a reduced US high yield bond (hedged) exposure on the likelihood of default rates rising given recession prospects.

Central banks in the Eurozone and the UK are lagging the Fed

We reduce our European and UK investment grade bond exposure to neutral as we think the European Central Bank and the Bank of England may raise rates further.

No Fed rate cuts this year means caution on US equities

While we do agree with markets that the Fed may pause from here, we slightly reduce our US equity exposure given the unrealistic market expectations for rapid and deep Fed rate cuts. Within our US reduced equities exposure, we continue to be invested in defensive styles such as minimum volatility and quality dividend payers.

Defensive European equities as a diversifier

We increase European minimum volatility equity exposure to diversify our European positioning and protect against volatility spikes, while maintaining a more cautious view on the broader Eurozone market.

The pick-up in China and Japan continues

We maintain an increased exposure to Asia-Pacific including Japan equities on attractive valuations and momentum from the region’s reopening.

Equities

Not time to re-risk yet

Our overall equity exposure is still marginally reduced vs our strategic (long-term) asset allocation. Although stock markets have performed relatively well this year, we do not think it is yet the time to increase exposure to risk in our portfolios.

Our positions:

Maintain preference for Asia-Pacific including Japan equities. We maintain our increased Asia-Pacific & Japan allocation within our overall equity positions as reopening in China and Japan continues, valuations are attractive, prospects for an earnings-led recovery more credible and inflation dynamics in China allow for a continuation of supportive central bank policies.
Reshuffle our developed market equity exposure. We reduce our exposure to US equities to slightly below average, given the solid performance year-to-date allowing to lock-in some of these gains and optimistic pricing of Fed rate cuts. We increase defensive (minimum volatility) pan-European equities, which could outperform if we see a spike in volatility or a downturn.

Credit

Add high-quality, reduce low-quality

We maintain a slightly cautious stance on credit, mainly the US high yield market, where banking-sector stresses, tighter credit standards and rate rises will likely be most acutely felt.

Our positions:

Increase exposure to US investment grade bonds (hedged) to neutral. US investment grade look set to benefit from the US Federal Reserve likely pausing its interest rate hiking cycle before the European Central Bank and the Bank of England.
Reduce our exposure to Eurozone/UK investment grade bonds to neutral. Our expectation that the European Central Bank and the Bank of England will likely deliver extra rate hikes make us more cautious.
Maintain our reduced exposure to US high yield bonds (hedged). The fast-paced tightening of credit conditions, rising default rates and the impending debt maturity wall for 2023 should exert further pressure.

Government bonds

Stay constructive as rates peak

We maintain our increased exposure to high-quality government bonds, particularly in the US where a pause in interest rate increases alongside recessionary pressures should be supportive.

Our positions:

Maintain above-average exposure to US Treasuries (hedged). We think valuations are attractive, especially given our belief that interest rates have likely peaked in the US.
Maintaining exposure to Eurozone and UK government bonds. We have a neutral exposure to Eurozone and UK government bonds as we view the inflation fight continuing.

Cash, gold and hedge funds

Expanding the range of strategic diversifiers

We maintain our local cash balances and hold gold as a strategic hedge at a neutral level relative to our new long-term allocation. We add exposure to a new asset class: hedge funds.

Our positions:

Maintain local cash balances: We think a neutral allocation vs our strategic asset allocation makes sense at this stage as our moderate defensive positioning is expresses via owing more government bonds than average.
Reduce allocation to gold: We structurally reduce our long-term gold allocation to make space for hedge funds. Given that we’re adding this extra diversifier, we hold gold at a neutral level to our new long-term allocation.
Add exposure to hedge funds: The proceeds from reducing gold free up capital to invest into hedge funds, which we see as long-term diversifiers of our portfolios risk and return.

Expanding the range of strategic diversifiers

Information correct as at 25 May 2023

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