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Asset allocation

Given the rapid technological advancements and globalisation of financial markets over the years, investing has become increasingly more complex and complicated – not to mention opaque.

This lack of transparency was laid bare not too long ago when one of the UK’s best known ‘star’ Fund Managers, Neil Woodford, told investors that they couldn’t sell their holdings, because many of his holdings were illiquid as they were in unquoted companies or small quoted companies, which amazingly, he didn’t realise couldn’t be sold at short notice!  Compounding the problem, many of his holdings were in biotechnology companies which require a high level of specialised expertise to fully understand – and as a result, many were found to be worth a lot less than Neil Woodford paid for them.

However, this level of risk wasn’t at all clear to retail investors – in fact most investors had no idea what was driving Neil Woodford’s performance or what risks he was taking with their investments.

Unfortunately, many investment documents contain an array of complicated strategies and definitions, such as ‘delta hedging’, ‘short gamma’, or ‘rho trading’ – and while these strategies sound very grand and important, they say absolutely nothing about the potential investment risks, just like mortgage-backed securities were seen as a secure investment, until the global financial crisis in 2008/9 exposed how low quality the underlying loans were.

At my wealth we like to keep things not only transparent, but simple, by investing in three asset classes; cash, bonds and equities – as we believe that these are the foundations of every successful investment strategy.

Additionally, we believe that risk management is just as important as investment performance and returns.  This means that while we will never shoot the lights out with our investment performance, our portfolios should hopefully allow you to have a good night’s sleep!

Our aim is to achieve a real return (i.e. above inflation) over the long-term, by investing in a diversified number of companies and investment funds from across global markets.

We have a dedicated, qualified and experienced Investment Management Team who actively monitor and manage client portfolios by researching, selecting and blending equities and investment funds.  As our Investment Managers have extensive access to these investment funds, it allows them to look at how each investment fund is positioned in terms of their actual and relative compositions. This means that they analyse the best way to blend these funds together to ensure that our client portfolios are fully diversified as it is pointless diversifying clients’ money by investing in a selection of different funds, if all those funds are all positioned in exactly the same underlying stocks and sectors.

In order to diversify our clients’ portfolios, the Investment Team splits down the international section geographically (i.e. US, Europe, Japan, Asia and Emerging Markets) and the UK section, where we hold direct equities. These are then split down on a sector basis (for example, mining, pharmaceuticals, banks, etc.).  This strategy allows the team to exploit the characteristics of each asset class, geography or sector, as one of each will always perform better than another due to different economic conditions.

The selections made by the Investment Team will differ in order to match different investor risk profiles – from a cautious strategy for low-risk investors to an adventurous strategy for investors willing to take more risk.

These risk portfolios have a benchmark allocation which we refer to as our ‘neutral position’. In order to make full use of our asset allocation, we have the ability to invest +/-5% either side of these neutral points if our Investment Managers believe this is where value could be added. This is referred to as our ‘actual position’.

We are underweight to cash by 2.62%

  • Major central banks have begun cutting interest rates and have continued with gradual reductions throughout the quarter, with further cuts expected.
  • The rate of said cuts will depend on the data coming out of major economies in 2025.
  • While cash returns are unlikely to fall back to the lows seen after the financial crisis, yields are likely to continue to gradually fall from current levels in the near term.
  • Yields on liquidity funds remain strong (currently around 4.7%).

We are overweight to the UK by 2.04%

  • Data this quarter has been disappointing, with falling consumer confidence, sluggish GDP growth, and rising unemployment. With higher employment taxes set to take effect in Q2 2025, the short-term outlook for UK corporates and the economy remains challenging.
  • Compared to other regions, the UK central bank has been slow with its monetary policy. Fortunately, the equity market has priced much of this in, and many investors and corporations have capitalised on this gap, seen in the recent surge of UK company acquisitions.
  • If inflation stays under control, interest rate cuts are likely later in the year. Though these will take time to affect the economy, they should improve sentiment, especially for consumers and corporations sensitive to interest rates.

We are underweight to fixed interest by 5% - our maximum underweight

  • UK government bond yields have been volatile throughout the quarter, but ended modestly higher than at the start.
  • Most of the volatility in fixed income markets has come from government bonds, while corporate bond spreads have remained tight and stable.
  • Volatility in government bond yields has been driven by uncertainty around growth, inflation, and deficits, while companies have shown strong financial discipline, with solid balance sheets and ample liquidity, positioning them well for short-term challenges.
  • Yields remain attractive despite tight spreads, with ongoing support from market dynamics.

No current exposure to Japan

  • In January 2025, the Bank of Japan raised its interest rate to 0.5%, the highest since 2008, signalling confidence in stable inflation. However, most of this inflation is imported, and Japan’s rates remain lower than other major economies, posing risks due to yen fluctuations affecting equities.
  • The weaker yen has boosted Japan’s exports, but the Bank of Japan’s hawkish stance may strengthen the yen, reducing competitiveness. Japan’s trade surplus with the US could lead to tariffs, potentially harming exporters and causing short-term market volatility.
  • Prime Minister Ishiba faces political challenges with declining approval ratings and the risk of his budget being rejected by Parliament unless it meets opposition demands, creating instability ahead of the Upper House election on July 27.
  • We have no exposure to Japan due to risks from currency fluctuations, trade dynamics, and political instability. Mid- and small-cap stocks could benefit from stimulus and better macro conditions, but we’re waiting for these conditions to materialise before considering opportunities.

We are overweight to Asia and Emerging markets by 1.50% and 3.00% respectively

  • China’s monetary easing and fiscal support have boosted stock valuations, which remain historically attractive. With ongoing stimulus and typical market growth after the Lunar New Year, the outlook is positive. Policy updates in mid-March should offer more clarity on government spending and additional stimulus.
  • The 10% tariffs on Chinese goods are much lower than the originally proposed 60%. Retaliatory tariffs from China on US products like coal and crude oil have been imposed, but the strong US-China economic ties suggest potential for constructive trade talks.
  • China has made strides in AI development with companies like DeepSeek and Alibaba’s Qwen entering the market. These new players have attracted attention, but their reliance on Nvidia chips and less advanced technology limits their potential to challenge the dominant market leaders in the near future, particularly from the perspective of Western consumers.
  • India’s economy is set for continued growth, fuelled by strong domestic consumption, a growing middle class, and infrastructure development. President Modi’s economic reforms, along with recent tax cuts, improve the outlook. India’s role as a counterbalance to China and strong US-India relations enhance its investment potential.
  • Trump’s proposed tariffs on Mexican goods and firm immigration stance could impact US-Latin America relations. While Latin America’s attractive valuations offer long-term investment appeal, we remain selective and focus on opportunities with favourable risk-reward profiles, minimising exposure to short-term risks.

We are overweight to the US by 3.75%

  • President Trump’s second term focuses on pro-business policies aimed at boosting economic growth, reducing regulations, and supporting domestic industries. His administration has already implemented executive orders aimed at boosting corporate profitability, with a focus on tax cuts, deregulation, and trade policies that prioritise American interests. These measures are expected to create a favourable outlook for US equities.
  • The Federal Reserve has reaffirmed its commitment to maintaining independence. Chair Jerome Powell has affirmed that policymakers will not be influenced by external forces despite ongoing calls from Trump and other major central banks to cut interest rates. Policymakers are expected to proceed cautiously and await clarity on fiscal and trade policies.
  • Trump’s proposed tariffs aim to address trade imbalances and protect US industries. While they may disrupt supply chains and raise costs short-term, they could lead to beneficial trade negotiations and give US companies, especially smaller businesses, a competitive edge. Retaliatory measures may cause short-term volatility, but these actions could advance US interests and foster more equitable trade, benefiting global equities long-term.
  • The “Magnificent 7” continues to drive US equity performance. Trump’s $500 billion pledge for Stargate, aimed at expanding AI infrastructure, will boost the dominance of major US tech firms. However, we note tech sector noise is not driven by fundamentals, like the initial market reaction to DeepSeek, a Chinese AI entrant. The market quickly rebounded as DeepSeek’s technology was found to be less advanced and still reliant on US leaders like Nvidia, highlighting the strength of US tech giants in AI.
  • The US dollar remains strong, serving as a safe haven amid yield curve volatility. With Trump’s focus on domestic policies and tariffs, along with the Fed’s cautious stance on rate cuts, this trend of dollar strength/stability is expected to continue.

We are underweight to Europe by -1.50%

  • The European Central Bank (ECB) remains supportive, cutting interest rates by 25 basis points in January 2025 due to weak economic data. Though some see this rate cut as premature amid US tariff uncertainty, lower borrowing costs should benefit markets and businesses, especially smaller-cap companies.
  • Political risks persist in France and Germany. France struggles with a divided government, raising concerns about fiscal stability. Germany faces uncertainty ahead of the snap national election on February 23, following the collapse of Chancellor Scholz’s coalition. This political instability may cause short-term noise as investors await clarity on leadership and policy.
  • European equity valuations are relatively attractive, presenting appealing opportunities. However, concerns remain for ongoing structural challenges and trade tensions, including the EU’s complex negotiations with China and the threat of US tariffs, particularly on autos and luxury goods.
  • Europe continues to feel the ongoing impact of Russia’s war in Ukraine, but there is optimism that President Trump’s historically cordial relationship with President Putin could help facilitate a resolution. Trump’s recent controversial remarks about US interests in Greenland, the Gaza Strip, and the Panama Canal have sparked widespread criticism and led to short-term market fluctuations. Such provocative comments rarely lead to tangible actions and should be seen as noise, not policy shifts. Historically, markets remain resilient during political rhetoric, with long-term trends driven by fundamentals.