Bespoke approach
The group is also running with some thematic ideas. For example, it recently bought into Irish aggregates business CRH, believing it could be a significant beneficiary of the drive for infrastructure spending in the US.
However, in general, the group is still avoiding businesses that are overly exposed to the economic cycle. Hills cautions: “There are still too many risks around and we don’t want weak cyclical businesses. Our clients are more geared to the long term.”
He says the Investec approach is to give every client a bespoke portfolio. “This is what our clients want. Working to models might reduce your business risk but it reduces your appeal to individual clients who feel they are being given a ‘product’. Our approach is collegiate and not prescriptive. We don’t believe in edicts from ivory towers.”
The group is more focused on avoiding mistakes than “shooting the lights out”, says Hills. “We generally have a better track record on that than the peer group. Our relative performance is better in the down years than in the up years. We believe the biggest shortcomings are revealed in weaker moments and we want to avoid those businesses with real flaws. We try to let the quality of companies make the majority of gains.”
The group’s portfolios tend to have a core strategic exposure, which doesn’t change very much, based on a client’s risk profile. On the equity side, this will be in large, stable global companies, such as Kodak or P&G. There will also be a tactical overlay that is moved around more actively to adapt to changing market conditions.
Long-term view
When implementing portfolio decisions, the group uses a blend of direct investments and collectives. Around £1 in every £3 under management is in collectives. The decision usually depends on size: there will be some clients with smaller portfolios who need more third-party managed products to diversify stock-specific risk.
Hills says: “If we are running a £2.5m mandate, and we want a 12% allocation for European equities, that is £300,000 and we might decide to do it directly. However, for £30,000 we would use collectives.”
There is a macroeconomic input into the process, which looks at the major drivers for GDP growth and what that economic growth or otherwise might mean for corporate profitability.
At each stage they will be looking at the best way to implement that view. For example, if the group believed worries in China had been overplayed, they might implement that view by buying an emerging market equity fund, commodities or mining shares.
Hills believes there is too much short-termism in the market and that investors must be clear about their priorities. If they require income, for example, they do not need to worry overly about short-term capital values. If they have 20 years until they retire, there is no need to worry about the next quarter’s earnings numbers. Hills says his clients increasingly heed this message.
Key themes
Sovereign risk
As the year has evolved, the group’s portfolios have moved progressively underweight in sovereign bonds, but not to zero as there is still a bit of insurance value against a large risk-off move by investors. The logic for the reduced exposure is both the prospect of increased supply if governments – not merely Trump – adopt looser fiscal policy as well as an anticipation of higher future inflation.
Playing volatility
Some of the portfolios G7 sovereign bond reduction has been redeployed in a mix of US high-yield bond funds, where the underlying economic cycle may be supportive of lower credit spreads, and emerging market debt, where there is also scope for some currency recovery given the bounce in commodity prices.
Cutting GEMs
The portfolio has trimmed its overall exposure to global equity markets to neutral as the year has passed. This is partly to lock in some significant gains, especially for sterling-based investors, but also because within equities any style rotation towards more cyclical names requires that greater economic sensitivity to be offset by lower weightings.
Yen ken
The portfolio is overweight Japan within equity exposure as it is believed that the corporate sector has both help from ‘Abenomics’ reform as well as a P&L account that is operationally geared to faster global growth. At least half of the fund’s yen exposure has been hedged back into either sterling or dollars.
Infra red
The portfolio has maintained and increased a good level of exposure to infrastructure. Although it is frequently cited by politicians as a target for more public spending, the fund has found particular appeal in the combination of attractive and growing income streams, low economic sensitivity and modest correlation with equity.
