Michael Pate has positioned the Killik & Co Managed Portfolio Service for a potential interest rate rise in the US, expected towards the end of the year, by allocating to American banks.
With a growing majority of market participants expecting a December rise from the Federal Reserve, Mr Pate has added Goldman Sachs and Wells Fargo into his model portfolios.
He called the positions in financials an “implicit bias” to the US raising rates, and a move that he deemed to be “pretty obvious”.
“That’s trying to balance some of the dangers that higher interest rates will cause to portfolios. We’re aware of the fact that markets are operating on peak margins at the moment and those margins are going to be squeezed by rates going higher and wages getting higher.”
The portfolios also added to short duration, and have used the profits from securities that reached maturity to add exposure to index-linked UK corporate bonds with the expectation that weaker sterling will result in a pick-up of inflation.
Exposure here also comes via directly held instruments, such as issuance from Intermediate Capital and Provident Financial, and index-linked bonds from Tesco Personal Finance. The manager has excluded government bonds from the model portfolios entirely, and avoided any corporate bond funds due to concerns over systemic risk.
“We don’t have any gilts or government bonds in the portfolio. Only corporates. We don’t use corporate bond funds at all because we think they’re systemically dangerous. We have no redemption date so we use individual corporate bonds, individual names with fixed maturities,” he said.
Mr Pate added: “The direction of travel this year is we’ve been shorter duration on the bonds, and as those bonds come to maturity we’ve been increasing the index-linked corporate bonds, which again is in anticipation of more inflation coming through from devaluation of sterling.”
On the equities side of the model portfolios, Mr Pate said there was a strong allocation to non-sterling stocks and global companies, many of which are denominated in US dollars.
However, recent sterling weakness prompted Mr Pate to begin an “incremental” rotation back into sterling, away from the current 50 to 60 per cent held US dollar-denominated stocks.
“We’re still running a large foreign currency exposure but we’ve had such a sharp move down in the pound that we’re just starting to normalise that position. But it’s very incremental.”
Mr Pate said that the range only used funds in order to gain access to a more difficult asset class or a theme not replicated by direct holdings, such as Japan and emerging markets.
He said outsourcing to multi-strategy funds, such as Ennismore Global Equity and the Aviva Investors Multi-Strategy range, reduced volatility and diversifies away from fixed income.
“There are a number of multi-strategy funds that we will use where clients want to reduce their volatility in portfolios. More recently, where we haven’t been able to find the value in the bond market, we’ve had to use those strategies a little bit more than we might otherwise have done.”
