Asset Allocator recently took a stroll through London to chat with the team at Shard Capital to discuss their forthcoming model portfolio service.
Despite its name, the wealth manager is not based in UK's tallest building, but rather in 70 St Mary Axe, affectionately known as the ‘Can of Ham’.
We sat down with head of research Ernst Knacke to hear about the team's MPS, which he hopes to launch on other platforms by the end of the year.
This upcoming MPS is certainly non-conformist when compared to the traditional 60:40 approach – which Knacke calls obsolete.
He has drawn on the framework of the company's pre-existing bespoke service which allocates based on four economic environments: disinflationary boom, reflation, stagflation, and deflationary bust.
The key, he says, is the belief we will spend less time in the ‘disinflationary boom’ has dominated the macroeconomy over the past four decades and more time in the other three, which he thinks produce significant challenges to traditional risk assets.
For Shard, alternative assets are a means of steering away from a dependence on orthodox capital markets, though of course these have held up pretty well so far.
This means it’s out with equities and bonds and in with alternative assets that provide more robust protection against inflation and drawdown risk – the issues that Knacke sees as the main eroder of client returns.
How does this play out in Shard’s allocations, then?
Well, his portfolio is split between four asset classes – beginning with 25 per cent slices but tactically shifting depending on the economic backdrop of the particular day.
At outset, this equals one quarter each in equities, fixed income, managed futures plus commodities, and gold plus Tips.
Part of the reason behind this strategy is Knacke’s belief that other allocators have always used far too much fixed income in their portfolios, which do not do enough to fight inflation.
But while more Tips and fewer bonds is rather unusual in our world, Shard’s equity exposure being composed entirely of passive ETFs is rather more mainstream these days.
Shard saves its active management budget to root out those working in CTAs, or commodity trading advisors.
Some managers in this space, he says, are absolutely worth their hefty 1.5 per cent fee.
If the fund in question can prove its strategy is truly unique and that it holds a competitive advantage over its peers, then Shard is onboard.
But if the manager is hiding behind the mistakes of his peer group, like ‘lemmings’, Knacke says this is an immediate red flag. Like many other allocators, he buys into a fund for a very specific purpose and expects the manager to execute said strategy in full.
This unorthodox MPS is not yet widely available, but we will soon find out if its unusual approach has many takers in the advice community and beyond.
