Seneca’s investment team has turned to higher-yielding bond funds run by managers including Michael Hasenstab, as well as specialist closed-ended vehicles, following a decision to decrease its equity weightings.
Alan Borrows, senior fund manager at the multi-asset specialist, said strong stockmarket returns had made the team “quite keen” to take profits from the asset class, both in the UK and overseas.
“We were about 6 per cent overweight to equities, but we have been reducing equity exposure over the past six months,” Mr Borrows said.
“Markets have performed well. We have seen growth and significant benefits overseas from the fall in sterling, and we have been quite keen to bank that.”
The team has reduced equity exposure in both the £117m Diversified Growth and £105m Diversified Income vehicles this year, and plans to continue cutting allocations in the coming months.
While the team tends to invest directly in UK equities, the move has affected some overseas equity funds.
Within Diversified Growth, the managers have reduced a position in the Yacktman US Equity fund. A position in Invesco Perpetual European Equity Income has also been reduced across both portfolios.
“We are very happy with all the managers, but it’s part of our asset allocation [decision],” Mr Borrows explained.
In keeping with their current defensive stance, the managers have been holding higher levels of cash than normal. Diversified Growth has a 5 per cent cash weighting, while its income counterpart holds 2.5 per cent.
The team has also been deploying new money in higher-yielding fixed income strategies.
As such, the managers have increased exposure to the Templeton Emerging Markets Bond fund, run by Mr Hasenstab and Laura Burakreis.
“[Emerging market debt] is still perceived as an improving environment,” Mr Borrows said.
“[Emerging markets] are following traditional monetary policy that has been abandoned by the western economies.”
Seneca also added to a position in the Royal London Short Duration Global High Yield Bond fund, managed by Azhar Hussain and Stephen Tapley.
“We view that as a cash plus [offering],” the manager said. “It’s high yield, but conservatively and sensibly run.”
Mr Borrows suggested that as equity weightings continue to fall, the team could continue to deploy cash into fixed income funds. One possible new addition could be M&G’s Global Floating Rate High Yield fund, run by James Tomlins and Stefan Isaacs.
Specialist closed-ended vehicles have also benefited from the shift out of equities.
The team has added the PRS Reit – which listed earlier this year and focuses on the UK’s private rented sector – to both portfolios.
“It has a six per cent yield once it’s fully invested. They want a 10 per cent total return for shareholders,” Mr Borrows said.
“We like situations where structural imbalances between demand and supply exist. The trust has support, irrespective of who may or may not be in power in the coming months.”
The Seneca team has also invested in the Funding Circle SME Income fund, which seeks to generate dividend income by lending to small businesses.