Mr Stubbs, who works on Fiducia’s model portfolios, noted that with higher inflation and infrastructure spending potentially on the horizon, the current environment could be detrimental for government bonds but better for physical assets.
“The pressure is coming through and we wouldn’t be surprised to see inflation going up next year. We may also have infrastructure spending programmes,” he said. “UK gilts have started to decline. Real assets might do better than financial assets like traditional equities and bonds.”
As such, he has cut exposure to “conventional” bond offerings, reducing his weighting to the M&G Global Macro Bond fund run by Jim Leaviss and is selling out of the iShares Emerging Asia Local Government Bond exchange-traded fund.
Mr Stubbs still favours certain fixed income portfolios, such as the M&G Inflation Linked Corporate Bond fund run by Ben Lord, which he believes can “capture inflation without the bond risk”, and Michael Hasenstab’s Templeton Global Bond offering.
However, the asset class represented only a small portion of the Fiducia Balanced portfolio at the end of September, with index-linked gilts and global bonds totalling just 8 per cent.
The manager has instead been focusing on “real assets”, with property and commodities making up 14 per cent and 5 per cent, respectively, of the Balanced portfolio at the end of September, and infrastructure representing 2 per cent.
In the property space – where open-ended funds came under pressure after the EU referendum but conditions appear to have eased since – Mr Stubbs has been adding to a Kames Property Income holding and also favouring offerings from Columbia Threadneedle and Henderson Global Investors. Both funds were recently reopened having been forced to suspend trading amid a spike in redemptions after the referendum at the end of June.
“Property is interesting, both tactically and in the long term,” he said. “Mainly with the open-ended funds it’s possible to return rental yield on the commercial property north of 6 per cent, at a time when it’s hard to get a yield. Supply and demand is quite well balanced. But because of the short-term sell-off, things went down in price.”
Meanwhile, he has been topping up on holdings such as BlackRock Natural Resources Growth & Income in a move to elevate commodity exposure.
“We don’t buy the physical commodities because in the long run we don’t think they make a real return,” Mr Stubbs added.
“We go for equities in the commodity space because historically they have more equity-like characteristics and outperform the commodities.”
In a bid to diversify his commodity exposure, Mr Stubbs also holds the Allianz Global Agricultural Trends fund, which he believes could benefit from food price inflation, while other real asset exposure comes from Lazard’s Global Listed Infrastructure fund.
In the equity space Mr Stubbs believes emerging market stocks have been “attractively priced for some time”, and counts the BlackRock Frontiers Investment Trust and the Veritas Asian fund among the range’s holdings.
But changes could be afoot as the investment team reviews its approach in this area. “We are in the process of assessing our emerging market managers,” Mr Stubbs explained.
