Mid Monthly Update – November 2019

Balanced or Unbalanced?
The old-fashioned balanced fund is still favoured by many investors as a sensible way of investing. Also referred to as a 60/40 portfolio where, depending on your risk appetite, the 60% is either in bonds or equities, the approach has morphed into a multi-asset style of investing encompassing more asset classes and more activity on the asset allocation front.
Some funds have even adopted a meaningful investment objective referencing inflation, like our own Dynamic Fund, but they remain few and far between for investors with as little as £1,000. We feel this is important as regulatory costs for advisers now mean that it is uneconomic for advisers to take on new clients with less than £100,000 in investable assets – not such a small amount – and one adviser recently told me their threshold is now £250,000. Note the unintended consequences FCA.
Back to the balanced investors who, until recently, were feeling pretty happy with their conventional split as bonds had given returns beyond expectations as UK gilt yields plummeted to substantially below inflation, unless you took on a lot of credit risk to counter low nominal gilt yields. However, bond yields have moved in the opposite direction in recent weeks, leaving many with a queasy feeling (10 year gilt yields have risen to 0.73% from a low of 0.40% in August this year as depicted below in the chart from Gilt yields are still well below inflation and after the recent near-doubling of yields, have incurred quite a hit to capital in a short space of time.

One of the key determinants of return and often overlooked as a source of volatility as well as return is currency. Many UK investors haven’t needed to be too concerned as Sterling has been something of a one-way bet, translating any foreign currency assets held into a capital gain. The following five-year graph of Sterling’s trade-weighted index’s fall gives you an idea of the positive impact of a weaker sterling for UK investors holding overseas assets.

Consequently, UK investors may have become complacent about a weak Sterling adding to performance even if it’s only from FTSE 100 companies whose constituents are heavily skewed to beneficiaries of foreign earnings.
October’s 5% rebound in Sterling against the US Dollar and the above basket of trade-weighted currencies was a reminder that there can be a negative hit to performance from a stronger UK currency.
Balancing currency risk to ensure any such move is limited in its impact on performance is as key as how much an investor might choose to have in bonds. Bonds might still be overpriced whereas you can make a case for Sterling being undervalued and having the potential to rally further.
Much will depend on the outcome of the December 12th General Election. It is not our place to gamble on binary outcomes with our clients’ money. However, it is our responsibility to mitigate negative risks to capital. Consequently, our portfolios reflect and have done so for some time, the cheapness of the UK currency and UK equities but not FTSE 100 companies.

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