In contrast, the recent weak performance of developed market investment-grade debt has made yields in this sector more attractive relative to government debt. He says: “We have tried to find some income stream in the high-yield area, which is seeing relatively low default rates.”
The group also includes some allocation to alternatives, though this varies from region to region. In Asia Pacific, the group is obliged to include some exposure to alternatives strategies as part of its portfolio, though this is not the case in Europe. In building this allocation, McFarland uses a combination of macroeconomic funds and long/short equity. He remains neutral on gold and commodities but positive on UK commercial property, where the strong economy continues to boost demand.
Dollar driven
McFarland believes that currency, and in particular the direction of the dollar, may prove very important over the next year. He says: “The consensus is still very much that the dollar is going north for the foreseeable future. There are good reasons for believing that but we think investors should be a little more wary. The higher dollar is impacting corporate profits and the currency account deficit has not narrowed, which may affect Federal Reserve decision-making. The dollar has not got much upside in our view.”
This will influence whether investors hedge their international positions and the Coutts team is currently operating a hedging strategy. McFarland says the team tends to hedge positions up to the benchmark.
In the meantime, McFarland is relatively optimistic on the outlook, believing the more extreme fears about the global economy are unlikely to come to fruition. It is an environment that is likely to favour risk-taking, particularly in fixed-income markets, where investors are now paying an increasingly high price for safety.
