Quilter’s WealthSelect managed portfolio service has used its quarterly rebalance to further reduce risk across the range as global economic growth appears sluggish.
Volatility has been a feature in markets since the beginning of the year as a result of increased geopolitical tensions following Russia’s invasion of Ukraine, inflation being more persistent than feared and concerns about how central banks can tackle these issues without choking off their respective economies.
As a result, portfolio manager Stuart Clark has rotated into traditional fixed income assets across the board, meanwhile also reducing exposure to equities and cash.
All risk levels, bar level 10, within the Managed range of portfolios have seen increases in the exposure to traditional fixed income via the HSBC Global Government Bond Index Fund, as well as topping up the higher-grade credit funds held within the portfolio.
Clark sees a more attractive entry point now than in previous rebalances preferring the balance of risk and reward opportunities in this area as opposed to equity. The Managed range will also see its slight value bias maintained despite recent underperformance in growth funds as the current environment and outlook continues to support that style of investing according to Clark.
In the first scheduled rebalance since the launch of the Responsible and Sustainable portfolios in the WealthSelect range, the changes to the Responsible portfolios follow a similar trajectory with cash and equities sold in favour of traditional fixed income.
However, within the Active Responsible portfolios, along with the Sustainable range, the government bond exposure will be achieved through the Aviva Investors Global Sovereign Bond Fund as Clark believes it has a strong approach to sovereign engagement.
The Responsible Active and Blend portfolios also see the introduction of a new holding – the Sparinvest Ethical Global Value Fund, a fund with strong ESG integration and strong focus on engagement, giving the portfolios further exposure to the value sector of the market.
Meanwhile, the Sustainable range sees the same rotation into traditional fixed income, but solely at the expense of global equities. These portfolios have also reduced their allocation to green bonds in favour of tilting to managers with a broader sustainable credit universe, helping to reduce the exposure to euro-denominated bonds at a time where ECB monetary policy is very uncertain. The equity allocation within the portfolio has been adjusted to increase the portfolio’s exposure to more defensive sectors, namely healthcare and utilities.
Stuart Clark, WealthSelect and Quilter Investors portfolio manager, said: “Central banks, and the Federal Reserve in particular, have what can only be described as a near impossible job. Inflation has remained stubbornly high and will do for some time to come, while global growth is looking increasingly threatened. The chances of a soft landing by the Fed seem more remote by the day. While central banks are in hiking mode for now, it won’t be long until they have to pause and potentially reverse course.
“We are in an environment of slowing global growth and high inflation. Companies are going to take a hit to their earnings, and it is clear they are facing real squeezes in their margins. Once we have a steady flow of weak corporate growth, or worse profit warnings, markets may experience another bout of uncomfortable volatility. This makes buying the current dip dangerous and why we wanted to add more ballast to the portfolios while maintaining flexibility should the outlook be more positive than feared.
“The portfolios have been underweight fixed income for some time now, but conditions are changing and the asset class does look as attractive as it has for some time. Given where yields are and that inflation should be at or near its peak, we felt it was prudent to add back to this exposure at a time where equities have a greater possibility of disappointing.”