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“Knee-jerk” portfolio changes are as big a risk to investors as any other, says 7IM’s Jack Turner

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Investor focus must remain on long-term trends to allow market views to fully crystalise, rather than knee-jerk reactions and portfolio churning, according to Jack Turner, Investment Manager at 7IM.

Despite growing concerns on rising inflation, tightening monetary policy, geopolitical tensions and new Covid-variants, the long-term market view has not shifted, Turner said.

“We seem to be at an inflection point in markets with a myriad of risks making investors lurch to the sell button. But while risks such as inflation, rising rates and geopolitical tensions all carry their own issues, the long-term view from our perspective is to keep going.

“The truth is, making knee-jerk changes to portfolios is just as big a risk as any other. Decisions made out of fear of temporary falls, or strategic portfolio decisions driven by negative headlines, are likely to be more damaging than anything else.”

Instead, Turner argued that a continuous approach to assessing the state of play and making adjustments with the future in mind is more beneficial. With this approach in mind, the team has made adjustments to its Responsible Choice Model Portfolios with a long-term focus at the core.

He added: “Since we went overweight equities in our model portfolios in August 2020, equity markets are up just under 40%. Hence, in the last few months, we have decided to take our profits from our overweight equity position and return to neutral, resulting in slightly higher cash levels.

“We still believe that the world is well placed for strong economic growth, but this is now being priced in more than it was previously. We are therefore taking a more selective approach to the equity market. A more robust consumer-driven cycle will see different winners emerge.”

Within 7IM’s Responsible Choice Model Portfolios, the team is focused on six key tactical themes; ageing demographics; bond risks; rising global temperatures; opportunities within emerging markets; global impact; and sustainable finance.

“As the world increasingly gets older, the healthcare sector is best placed to take advantage of this. The sector still trades at a discount despite Biden’s US election win in November 2020 and we believe forward looking returns should be strong,” Turner stated.

He continued: “As for the outlook on bonds, these don’t provide the safety they once did and could suffer losses as central banks begin to hike again. We therefore hold lower duration instruments to offset this risk.

“The rising threat of climate change is another major risk. Within our Responsible Choice Models, we target those companies that are not only managing their environmental risks but also investing in a cleaner future.” 

Sustainability Commitments

As part of its ‘Cleaner investments’ initiative, 7IM has committed to a 30% reduction in carbon emissions within its Strategic Asset Allocation (SAA) framework, which underpins all of its Model Portfolios.

So far, this has seen the firm switching out over £300 million of assets into lower carbon investments, resulting in a 40% reduction in carbon emissions compared to the previous holding.

The ‘Cleaner investments’ commitment is one of four Sustainability Commitments that 7IM has made, including; Implementing ‘Sustainable choices’ at a business level to achieve a 20% reduction in Scope 1, 2 & 3[1] CO2 emissions and being carbon neutral from 2021; achieving a diverse and equitable employee base; and ‘Giving back’ through supporting a number of charities aiming to reduce inequalities.

Attractive opportunities

The Responsible Choice Models, which have just passed the one-year anniversary mark, also focus on identifying opportunities within emerging markets that will come from the transition to a more carbon-neutral world.

“The funding gap to meet the Sustainable Development Goals by 2030 is between $6-8 trillion and 70% of that is needed in emerging markets. We are therefore seeing a number of compelling opportunities for investors to access in EM across both the equity and fixed income markets,” says Turner.

“We also look at global opportunities across the impact space, identifying those investments that are focused on delivering a material and measurable improvement to environmental and social problems.”

Alongside this the portfolios also have exposure to both green bonds and social bonds linked to sustainable projects.

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