AJ Bell Investments has added to its fixed income exposure within its AJ Bell Funds and MPS ranges, while it has also reduced its weighting to US equities.
In the firm’s strategic asset allocation report for 2024, it argued the “painful” interest rate rising cycle that has been seen in developed markets in the last 12 months has come to an end, providing a more positive outlook for investors, particularly towards the lower end of the risk spectrum.
As a result, within its lower risk portfolios the allocation to global high yield (hedged) has been reduced in favour of UK corporate bonds, while the allocation to cash was moderated and reallocated to UK government bonds and some UK corporate bonds.
“The opportunity to add exposure to fixed interest where yields now look appealing feels like an appropriate move for 2024,” said Ryan Hughes, investments director at AJ Bell Investments.
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“At this point, with interest rates deemed near their peak, the reinvestment risk of cash can be high and denying the portfolios the opportunity to participate in any possible re-steepening of the yield curve would be to deny them the traditional downside protection from government bonds in a wider ‘risk off’ environment,” he added.
When compared to the returns available from cash and assets with lower volatility, Hughes admitted the overall case for global equities does look less attractive at the start of the year.
“Within equities the situation is more nuanced,” he said. “However, valuation dispersions remain wide and therefore adjustment away from the US and towards lower P/E markets, such as Europe and Japan, feels more appropriate.”
As a result, across AJ Bell’s portfolios the exposure to US equities has been cut by four percentage points (pps), while the weighting to Europe has been increased in the region of 2-4pps depending on the risk profile of the MPS.
“We accept that we do not know what 2024 will bring [neither does anyone else for that matter] and we have avoided making dramatic changes to the equity/bond split of portfolios, a major determinant of how they will perform in different market environments,” Hughes said.
“In all portfolios, there remains significant diversification to ensure that no one type of risk dominates,” he added.
