Parmenion moves underweight EMs

Parmenion has moved underweight emerging markets within its tactical portfolios, amid rising concerns over the impact of a slowdown in Chinese growth.

The discretionary manager was previously neutral on emerging markets after piling cash into the sector at the beginning of June.

However, China’s devaluation of the renminbi in early August was perceived as a sign of a more pronounced economic slowdown and caused a widespread equity sell-off.

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The MSCI Emerging Markets index slid to a six-year low last month, with commodities and emerging market currencies under pressure as a result of their close links to the health of the Chinese economy.

These slumps have made Parmenion nervous, but the decision to move to an underweight position was difficult, according to senior investment manager Meera Hearnden.

She said: “We kept going back and forth. We were wondering, is now the time to be overweight given everything has dropped so low?

“But we felt that with the impending US [interest] rate rise we could see a further correction and values might drop lower.”

Ms Hearnden added the group would strongly consider moving overweight the asset class once the impact of the first rate rise in the US was evident.

Elsewhere, Parmenion remains confident in its overweight in property, but has shifted its allocation to focus on “secondary property”, which includes non-office and retail property in and outside of London.

The group invests in three property funds: SLI Ignis UK Property, L&G UK Property and Threadneedle UK Property.

Parmenion has cut back on holdings in the Ignis and L&G vehicles and has put the money into the Threadneedle fund, because the latter focuses more on secondary property.

While some investors were nervous that the asset class was becoming overheated, Ms Hearnden said the group “felt we had to have property in an overall falling market as it provides income”.

She added: “The returns from property have been out of the ordinary for the past three years, so we are just heading back to basics. Property was always known for its respectable income with minimum capital growth.”

Parmenion’s major concern around the sector centres on liquidity. It suspects investors unsatisfied with lower levels of returns may begin to pull their money from holdings.

In light of this the team has focused on bricks and mortar funds, which it considers to be more stable.

Another sector battling both liquidity concerns and declining returns is the bond market. Parmenion has opted for strategic bond portfolios over corporate bond funds or gilts in this space.

In particular, the team is continuing to back the M&G Optimal Income, the Jupiter Strategic Bond and the TwentyFour Dynamic Bond vehicles.

“These funds can use derivatives and get that extra diversification,” Ms Hearnden said.

“The TwentyFour fund in particular diversifies into quite a few esoteric instruments, such as CoCos [contingent convertible bonds] and residential mortgages.”