7IM has decreased the fixed income allocation in favour of alternatives in its cautious and balanced portfolios.
Matthew Yeates, deputy chief investment officer at the discretionary fund manager, said the year-to-date has seen heightened volatility in lower risk portfolios, including 7IM’s cautious and moderately cautious.
“What has been particularly unusual is that the volatility in these portfolios has been driven as much by the bond component of portfolios, as by the equity portion,” he said.
“This has seen the risk of bonds relative to equities increase, due to the inflationary backdrop and rising interest rates."
The portfolios are now almost duration neutral in fixed income, meaning the managers are not expressing a view on the direction or timing of when interest rates will change.
“It is hard to argue that yields have as far to go as they did at the start of the year when we were really in an aberration in terms of fixed income markets,” he said.
Strategic asset allocation changes to the cautious portfolio
Asset class | Cautious (2021) | Cautious (2022) |
Equity and REITS | 17.0% | 23.0% |
Government Bonds | 33.0% | 25.0% |
Investment Grade Credit | 24.0% | 20.0% |
High Yield/EM Bonds | 7.0% | 13.0% |
Alternatives | 16.0% | 16.0% |
Cash | 3.0% | 3.0% |
Source: 7IM
The yield of UK two-year gilts, which are sensitive to interest rate expectations, have soared in the year-to-date, rising from 0.8 per cent in January to a high of 2.3 per cent at the end of June.
After dropping in July, the yield rose to 2.2 per cent this morning after another month of high inflation spurred expectations of further interest rate rises from the Bank of England.
Yields have been rising as interest rate rises make the assets less attractive, pushing prices down.
The lower a bond’s price, the higher its yield, as the fixed coupon is worth more relative to the cost of the product.
The allocation to government bonds in the cautious portfolio has dropped by 8 percentage points, remaining level in the balanced portfolio, and investment grade credit by 4 percentage points, dropping by five in the balanced portfolio.
Strategic asset allocation changes to the cautious portfolio
Asset class | Balanced (2021) | Balanced (2022) |
Equity and REITS | 53.0% | 57.0% |
Government Bonds | 5.0% | 5.0% |
Investment Grade Credit | 13.0% | 8.0% |
High Yield/EM Bonds | 14.0% | 15.0% |
Alternatives | 12.0% | 12.0% |
Cash | 3.0% | 3.0% |
Source: 7IM
The group has been increasing its allocation to alternatives over the past few years, including Reits, as a diversifier.
“[This has] continued to deliver exactly the sort of defensive properties we wanted – and have done so again in 2022, despite equity and bond markets both falling,” Yeates said.
“This continued robust and stable performance of alternatives has given us increased confidence in their diversification properties in strategic portfolios.”
As a result of these changes, the moderately cautious portfolio and multi-manager funds have been moved from the IA mixed investment 0-35 per cent shares sector into the IA mixed investment 20-60 per cent shares sector.
A spokesperson for 7IM said: “While these funds have moved sectors, this is not a departure from the way 7IM runs portfolios – and its investment philosophy and identity remain unchanged.”
sally.hickey@ft.com
