Parmenion’s range of model portfolios is avoiding funds with a particular style bias in the belief that global and political uncertainty are making sector views too difficult to implement.
Investment manager Andrew Gilbert said the team’s concerns had caused them to focus on managers who attempt to limit volatility and offer less risk of capital loss.
The rise of political parties pushing protectionist policies, Britain’s future relationship with the EU, a surprise Trump presidency, and an unclear future relationship between monetary and fiscal policy in many markets are among the team’s main macroeconomic worries.
These risks have made the team unsure what type of equity market style will prosper in future. As a result, Mr Gilbert said he is looking to funds which he believes can insulate themselves from external shocks, such as Old Mutual North American Equity.
“If you’re unsure as to which style is going to do particularly well going forwards, which is the outlook that we currently have, then you want a fund that doesn’t have any specific style biases,” he said.
Along similar lines, Goldman Sachs’ Global Fixed Income Portfolio was recently added to the range for its strong risk controls and alignment to the Barclays Global Aggregate benchmark.
“It focuses on trying to maximise your risk-adjusted return without taking on more specific style biases or external correlations that you weren’t anticipating. That’s an area we’re concerned with – fund managers taking unanticipated factor exposures,” Mr Gilbert added.
Although the range has tended to favour shorter dated bond funds, one position, Fidelity MoneyBuilder Income, has a longer than average duration of about seven years. Mr Gilbert described manager Ian Spreadbury as a “safe pair of hands”, and noted many rival managers have found themselves on the wrong side of the interest rate trade in recent years.
Some have been too quick to assume that central banks will hike base rates and cause bonds to suffer, he added.
“[Mr Spreadbury] has a slightly longer duration than his peer group but a lot of managers have got the duration call wrong historically. They’ve been holding short positions when interest rate expectations have been pushed out.”
Parmenion’s shorter duration exposure is also more conventional than many peers’, stemming from funds such as M&G Optimal Income and Kames Investment Grade Bond.
“Everyone’s been anticipating that we move away from this [environment] where asset prices are supported by monetary policy and that we’re going to move back to fundamentals; at some point the yield curve has to revert, it cannot continue to go down.
“And so, over the past five years, a whole sea of fund managers have been predicting this increase in yields and essentially got the timing wrong.
“Being in a short-duration position has actually reduced your returns against a passive index.”
But Mr Gilbert acknowledged that shorter duration plays did have value as a way of guarding against a spike in yields.
“When the yield curve does reverse, they are positioned to protect capital. As we have seen over the past month and a half, the yield curve can kick up quite significantly. [But] the timing of this is very difficult to predict.”
Key numbers
51.6%
Proportion of the firm’s ‘global alpha’ bucket accounted for by Old Mutual North American Equity
30%
Allocation to fixed interest in the medium-risk portfolio
