The Rathbones Multi-Asset Total Return Portfolio has been taking advantage of the large falls in the price of corporate bonds to add a number of high yield and investment grade bonds to the portfolio.
At the same time, David Coombs, head of multi-assets at Rathbones, said the fund did a lot of trading in May and the start of June to add a number of equities he described as being “much cheaper than we’ve ever seen them”.
“The high yield markets were very gummed up in April, yet liquidity returned in May allowing us to pick up some bonds at attractive prices,” he said
“We don’t necessarily intend to hold these bonds until they mature, instead we will hold them until their prices return to more reasonable levels”, he added.
While Coombs conceded there is a chance of more shorter-term falls and indeed that might be completely wrong and their values may never recover, he believes these risks are more than compensated by their low prices.
“Essentially, we are being paid to take on the volatility of these assets, which we are comfortable doing as part of a balanced portfolio,” he said.
Short-term focus
According to Coombs, having rallied at the end of May and then selling off abruptly in June, we are now officially in a bear market (when stocks fall more than 20%).
“The reason for the fickle and erratic markets is likely no surprise: inflation,” he said.
“By late May, investors and talking heads had convinced themselves that American inflation had peaked and was coming down. This hope buoyed stocks and bonds.
“Then, in early June, the resilience crumbled and stocks and bond prices dropped in unison, compounded by US inflation hitting a new multi-decade high of 8.6%.”
The end result, Coombs added, is that many parts of the market are much more focused on the short term.
“Algorithmic trading — where computers trade countless times using signals measured in seconds or days — often seems to overwhelm those people who are trying to take the long view,” he said
“We believe this gives flesh and blood traders an advantage in times of dislocation; big swings in markets offer more prices at which you can buy or sell,” he added.
“But it truly is very tough to hold your nerve when you’re not a machine.”
In terms of the fund’s exposure. Coombs said he has been rebalancing the portfolio and adding a number of stocks which have become cheaper.
“We have the confidence to buy stocks because we are buying companies with little debt, strong profits generated predominantly in hard cash and reliable growth over the next five to 10 years,” he said.
“Put simply, we are buying businesses that we believe are likely to survive and even thrive regardless of whether economic troubles drag on for three months or three years,” he added.
“Meanwhile, over the past year or so we have built up positions in defensive assets that should mitigate shorter-term swings in stock markets. These have done us well so far.”
