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Kilpatrick reduces ‘riskier’ asset classes

Kilpatrick reduces ‘riskier’ asset classes

Cornelian’s Hector Kilpatrick has divested holdings in what he sees as riskier bets and has ramped up cash weightings across his portfolios as he turns bearish about the US.

The chief investment officer of Scottish discretionary manager Cornelian said the start of March had signalled a sea change in his view of the world, as mounting economic disappointments from the US tipped him away from his pro-risk stance.

Mr Kilpatrick, who manages Cornelian’s range of model portfolios and risk-managed funds, said he had been “reducing riskier parts of all asset classes” in the past month.

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Having previously held a bullish market outlook, the manager said he had been “reappraising that view and coming to the opinion that the risks out there to global growth and deflationary pressures are mounting”.

His actions have included reducing exposure to US equities across his funds by selling down his holdings in the Vanguard S&P 500 tracker and the Polar Capital Technology fund.

He has mostly sold out of his position in the Neuberger Berman Global Floating Rate Income investment trust because of his fear the first US interest rate rise will be pushed back further.

Mr Kilpatrick said he was also concerned about increasingly “lax standards attached to most recent floating rate notes” as companies raced to issue the bonds to satisfy the “feeding frenzy” of investor demand in the face of imminent rate rises, which floating rate notes provide protection against.

However, he thought a decline in US economic performance would push back the date of an interest rate increase, which could cause a sell-off in floating rate notes.

“The US economy is not as strong as people think – there is a lot of worrying data,” he said.

US companies had ramped up for 2015 hoping for a strong year, but US growth was probably going to come in below forecast, the manager said.

Given his view of the perilous state of the US economy, Mr Kilpatrick said a rate rise at any point in the near future would be “bad news” for markets and could cause a liquidity shock as investors rushed to take money out of markets.

Having sold down riskier assets, he said he now had higher-than-normal weightings towards cash and near-cash assets throughout his portfolios.

The SVS Cornelian Defensive fund now had 15 per cent in cash and a further 4.5 per cent in what Mr Kilpatrick described as near-cash instruments, which were mainly short-dated US treasury bonds.

The cash level is progressively smaller for the more aggressive funds, but even the highest-risk portfolio has 5 per cent in cash and 4.5 per cent in near-cash assets.

Mr Kilpatrick said he could not predict if and when there could be a “hiccup” in asset prices, but added the evidence suggested the “chances are rising”, which was why he was “incrementally reducing risk”.