Psigma has been moving out of “hideously expensive” gilts and other strong performers from the summer as investment strategy head Rory McPherson warns a market correction looks likely.
UK government bonds and other assets such as emerging market equities have performed well since late June, aided by factors including risk-off sentiment among investors and a drop in sterling after the UK’s vote to leave the EU.
However, elevated valuations have prompted Psigma’s managed portfolio service team to take profits on such positions, with Mr McPherson warning a “pullback” could hit markets.
“As we saw the rally we sold our allocation to gilts,” Mr McPherson said. “We put that on pre-Brexit, at the start of May, when a 10-year UK government bond yielded about 1.6 per cent.
“When that fell to 0.5 per cent a couple of weeks ago, we pared that back. Yields are now at about 0.85 per cent.
“We think those assets are hideously expensive, but they do well. We are happy to own them when we think a growth scare will come through or there’s a risk-off event.”
This has seen the team cut back its exposure to Mike Riddell’s £1bn Allianz Gilt Yield fund – leaving only a small position.
They have also attempted to move away from areas that benefited from recent currency moves, such as emerging market equities.
“We have scaled back stuff that has done well from currency or interest rates,” Mr McPherson explained.
As a result, the team has reduced positions in the Mirabaud Equities Global Emerging Markets fund, and in strong performers such as First State Global Resources and BlackRock Gold and General.
The managed portfolios remain relatively cautiously positioned.
Mr McPherson noted that, in the Balanced offering, reductions to positions such as the Allianz fund had taken cash levels to 6 per cent – marking a rise of around 2 percentage points.
Mr McPherson highlighted some areas that he believed show potential, however. For example, the team has added to a holding in Neuberger Berman’s Short Duration Emerging Market Debt product in the expectation of strong returns.
“That’s a cash plus fund,” he said. “We are not expecting super exciting returns from that, but there’s a good value case for hard currency emerging market debt.”
He also continued to favour areas such as Japan, with holdings such as RWC Nissay Japan Focus contributing to a “meaningful” overweight to the region, while staying underweight the US because of high valuations.
Mr McPherson also remained an advocate of specialist credit, with the Balanced portfolio having a 7 per cent allocation to TwentyFour Asset Backed Income at the end of June.