Raise cash levels
We are strong believers that multi-asset investors should make full use of the flexibility their broad mandates permit. As such, we are advocates of raising liquidity levels when conditions begin to imply higher volatility levels.
One of the key advantages of holding cash, particularly for active multi-asset investors, is that increased liquidity allows for opportunistic purchases when valuations decline to attractive levels and discounts widen for investment trusts. It is a means for us to stay on the front foot.
Central banks will be doing everything they can to taper stimulus without a market tantrum. But there is plenty of room for market gyrations against a complex macro-economic picture and a pandemic that has still not entirely abated. Hence, a cash position that does not present too much of an opportunity cost is sensible at this point. We currently hold 4.3% in cash, compared with our less than 2% average over the past 5 years.
Dig deeper in private equity
As the recovery is becoming more uncertain and some of the “easy gains” have already been made, it is particularly important to continue to look for opportunities for the next stage of the cycle.
Private equity is one of the most compelling themes across the investment landscape and remains significantly undervalued. Trusts that we own in this space, such as Oakley Capital Investments and Pantheon International, continue to trade at attractive valuations relative to their peers, and, at appealing discounts, to their net asset valuations.
These valuations look increasingly conservative in these trusts given the lag in their reporting at a time when public equity markets have continued to rise strongly. We have thus increased our position in our private equity holdings.
Invest in decarbonisation
At present, lower yields also reflect the uneasy sentiment about the future, as well as highly stimulatory measures from central banks, which might trigger inflationary pressures. This type of environment has been historically good for metals and commodities.
However, our focus of investment in this area is around the continued undervaluation of the mining companies, more so than in the metals themselves. We see opportunities in the relative potential of growth in precious metals miners versus the rest of the market, given the strength of their cashflows and of their balance sheets.
A further driving factor is the race to achieve net zero emissions. The world is moving from a fossil-fuel intensive economy to a materials-intensive economy. Miners, somewhat paradoxically, are essential to this decarbonisation process, if we are to turn the tables on climate change. We see selected investment trusts such as Blackrock World Mining Trust as a cheap way to access this long-term structural trend. Equally, listed utilities are often ignored by investors while they are an integral part of the move towards renewable energy. Trusts like the Ecofin Global Utilities and Infrastructure are another way we play that theme, without paying the hefty premiums attached to pure renewables trusts.
Be flexible in fixed income
With record low or negative yields on a range of government and investment grade securities, the risk/return reward in fixed income is not looking particularly appealing. That said, there are opportunities for investors willing to explore below the surface.
We increased our positions in more defensive plays as the cycle progressed, but only in strategies and trusts that present attractive upside as well as some protection relative to equities. For example, we increased our exposure in the TwentyFour Income Fund. This is a bond trust that invests in higher-yielding asset-backed securities such as mortgages, credit card debt and auto loans. Those assets have lagged the recovery despite presenting some cyclicality. Meanwhile, the quality of the credit work from the team at TwentyFour gives us protection on the downside and the fact that asset-backed securities use floating rather than fixed rates offers a hedge against rising rates if the reflationary environment proves more than transitory.