Following his recent Citywire roundtable on MPS allocators, we caught up with Harry Garrett, Head of Investment, to discuss the challenges and opportunities shaping portfolios today, from alternatives and small caps to the role of asset allocation.
You can also watch the highlights from his discussion below.
What do you think is the biggest challenge in markets today?
Diversification is challenging in my opinion. It feels like the market is moving on one mega theme which is AI and therefore we are seeing increased correlation of global equity markets.
For me, diversification isn’t a freebie anymore, you have to create it. Which is why owning your asset allocation is critical.
Forget the old active versus passive debate, you need to focus on asset allocation.
The biggest challenge is making sure you have an asset allocation that provides good diversification and, therefore, a level of consistency through numerous market events and right now that means some kind of non-index element to either asset allocation, or fund selection, or both.
Could alternatives play that role in a portfolio?
100% alternatives have a role to play in multi asset portfolios, in my view.
This really stems from my view and focus on diversification and actively seeking different sources of return through different market events. That’s our primary objective across our portfolio suite.
Ultimately, in a world of increased market concentration around the AI theme on the equity side, plus mounting government debt piles on the bond side, there are risks to both major asset classes (bonds and equities) and, therefore, where do you hide if the AI trade begins to reverse or the market wakes up to deficits?
For me, it's a no-brainer. You just need to know what your exposure looks like and what it's trying to achieve, so you can assess whether it's been successful.
Which sector are you feeling most excited about? And which sector are you most concerned about?
We’re excited about smaller companies which have been a position in both our active and passive portfolios, for a long period of time. We think the sector offers:
- A strong earnings picture
- Historic low valuations versus large caps
- An empirical long-term return premium
- Enhanced diversification of returns
What’s not to like?
We’re cautious about duration within fixed income. I appreciate yields are at long time highs, so valuations look compelling. However, I still see duration as a risk. And a lot of that comes down to where fixed income is held most heavily within most portfolio ranges, who those underlying clients are, and why they’re there. Especially at the very low end of the risk spectrum.
That doesn’t mean we have no duration in portfolios, we are just wary of it and the impact it can have on low risk portfolios that don’t have an equity offset.
Is there an asset class where you’d never invest passively?
Short answer. For most asset classes you can invest in passive products. I’m not ignorant enough to write off index investing, it has done a phenomenal job for clients for a long time. Will that change over the next 10 years? Maybe. We offer clients a range of portfolios from fully index to blended/active and I think that’s important.
But even in a world of pure index tracking asset class exposure, you still need to understand what you are buying. Which index are you invested in and how does it differ from alternatives indices which on the face of it should deliver a similar or the same outcome.
Take Emerging Markets as an example. Whether your index fund has tracked MSCI or FTSE Emerging over the last five years has led to vastly different outcomes because of the difference in underlying country allocations.
We switched away from an index fund tracking FTSE Emerging to buy one tracking MSCI Emerging around two years ago, which has since proved to be a fantastic move, as we picked up Korean exposure as part of that.
My point is, there has to be an active decision somewhere, even in your choice of index tracker.
Lastly, while alternatives exposure can technically be created via a basket of index tracking products, I do believe that alternatives are better served by active management.
Are you worried pre-Budget speculation could again play havoc with gilt yields and other UK assets?
We won’t be looking to make any significant changes to portfolios because of the Budget.
I am sure volatility will increase in the lead up. Last year’s became a bit of a circus with it being set as late as possible which ultimately just led to an unhealthy amount of anticipation of mostly wrong theories on the outcome. That wasn’t good for markets because it led to heightened uncertainty.
I hope there’ll be less uncertainty this time around as the date is fixed and much earlier.
Is there a favourite fund you hold in Parmenion’s portfolios?
We have a mix of managers and teams from large fund houses and boutiques. I don’t prefer one or the other, it’s about us understanding the team and having confidence in their ability to deliver what they promise.
We meet all sorts of fund managers with different stories to tell and for me, our role as investment managers is to focus on the outcome, not the stories. We build good relationships with the managers of funds we own and that’s because we tend to own them for a long time. But if we need to move on, we move on.
I don’t think there is any room for fund or manager affection.
You can watch the full roundtable here: MPS Allocators: How to deal with ‘mad’ moves in emerging markets.
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