Emerging market bonds have become the largest absolute position in Seven Investment Management’s Cautious discretionary portfolio.
In its latest update for investors, the group said its exposure to emerging market bonds had risen by 3 percentage points in the Cautious portfolio, taking the weighting to 12 per cent – the largest exposure to any asset class. It was one of only four classes to be increased in the second quarter.
Much of the move appears to have been funded by large cuts in equity exposure, particularly in UK and US equities.
The asset allocation team that runs the portfolios includes chief investment strategist Ros Price, chief investment officer Chris Darbyshire and 7IM co-founder Justin Urquhart Stewart.
“Emerging markets have been recovering after the poor first quarter and still offer good value, with longer term prospects backed by improving economic situations in many countries,” the group said.
“We still recognise the risks from poor governance at both the corporate and country level in some cases, but we are well aware that so-called emerging markets will soon comprise the lion’s share of global growth.
“In China, where the worries about the health of the economy have for several years brought poor relative performance, the economy seems to be regaining investor confidence once more as the authorities have again applied a little judicious stimulus.”
In the group’s Growth portfolio, emerging market bonds rose by 2 percentage points to 6 per cent, but continue not to feature in its Aggressive Growth portfolio.
The group said it still “liked the riskier end of the fixed income market”, including emerging market bonds and high yield, and was “looking for opportunities in the higher quality range”.
Broad data shows dollar-denominated global emerging market debt has been performing more strongly than global government bonds.
The Citi Global Emerging Markets US Dollar Government Bond index has risen nearly 11 per cent in the past year, compared with 6.8 per cent for the Citi World Government Bond index, both in dollar terms, according to data from FE Analytics.
Elsewhere, the group now has an 8 per cent exposure to UK equities in its Cautious portfolio – a level dropped by 4.5 percentage points from the previous quarter.
The portfolio now no longer has exposure to UK small cap stocks after the remaining 1 per cent allocation was sold down, and US equities have been cut by 2 percentage points to 4 per cent of the portfolio.
“As part of a return to a more conventional investing environment, more discretion will be needed when choosing between equity regions,” the group said.
“The FTSE 100 has seen valuations expand by nearly 50 per cent in the past two years. Mining, energy and financial companies make up the bulk of this index, and are unlikely to see earnings catch up in the near future.
“S&P 500 earnings growth has been reasonably healthy, driven by the domestic recovery, but even so, valuations have risen at a faster pace.”
The managers also appear bearish on European stocks, which were also reduced in the Cautious portfolio by 1 percentage point to 7 per cent.
“European equities have recovered well since the sovereign debt crisis of 2011, and are now approaching the point where that mispricing has almost corrected,” the group said.
“Company earnings may not be strong enough yet to justify further appreciation.”
The managers did, however, increase exposure to Japanese equities and Far East ex-Japan equities by 2 percentage points, meaning the latter was reintroduced to the portfolio as there had been no allocation.
“In Japan, we remain positive about the potential for growth that prime minister Shinzo Abe’s reforms offer,” the group said.
