Many investors are weighing their options over how to best utilise anticipated volatility surrounding what has been widely labelled as the toughest election to call in a generation.
However, Andrew, manager of M&G’s Episode Income Fund, is preferring a pragmatic approach regarding the allocation of his equity exposure.
“It is the same as any other fundamental or political event, where there is an anticipation of price variation or change,” he explained. “We are not positioning in a pre-emptive fashion – we are simply considering whether the market offering has changed to give us a great value-discount on some equities.
“If UK equities get upset because of the apparent result of a new coalition or a hung parliament, to my mind that would increase our future returns. So we would look to selectively add to positions if the market was distressed in that way, but ultimately [the key aspect] is the fundamentals of the companies – which are by-and-large global – and they should not be overly perturbed.”
He continued: “Volatility is a friend – we should not confuse it with risk. If the market is kind enough to give us a discount on something that is fundamentally good value, this is the right territory for us to exploit. We will await the results of the election and if we get the opportunity to step in afterwards then we will do.”
Even with George Osborne having delivered the 2015 Budget outlook on 18 March – which, one assumes, would offer investors an indication of how markets will behave – Andrew remains reluctant to make any premature moves.
“Without being too political, budgets are the detail,” he said. “In terms of macro pushes and pulls on the UK corporate sector, there are lots of other things going on.
“The fact that we continue to have consistency and a modicum of predictability about the fiscal stance, rather than being important in itself, it is important to have got it out of the way.”
Sterling approach
Despite his unwillingness to be drawn into making calls based potential outcomes, there is one aspect of the election that Andrew is confident of capitalising on.
“I still see foreign exchange as one of the potential areas for market disruption, and maybe get even more interesting,” he expanded. “Therefore I will keep my exposure to the dollar and away from sterling, particularly as there will be opportunities for sterling being more volatile presented to us over the next six weeks or so.”
As of 28 February, currencies represent 6% of Andrew’s portfolio holdings, of which 5% is in US dollar, while the Mexican peso, Canadian dollar and Hong Kong dollar all account for 3%.
“In light of the euro and sterling depreciating, we remain of the view that the dollar will continue to depreciate and the euro will continue to decline over a reasonable time-period,” said Andrew.
“[However], I do not usually like to keep more than 5% of this fund in cash, and tend to actively look to invest most of that cash.”
Another significant area in the Episode Income portfolio is the equity weighting, which currently stands overweight against the sector average at 48%.
Having not held any European equity positions 12 months ago, following ECB QE the sector now represents 16% of the overall equity weighting, while the UK portion stands at 13%.
Andrew is underweight fixed income at 42%. He prefers credit to “mainstream” government bonds, as exhibited by his 8.6% and 5.4% weightings to US and UK corporates respectively, out of the 18% portfolio dedication to the asset class.
However, he does like “non-mainstream” side of the government bond spectrum, which carries a 19% portfolio weighting compared to 5% in mainstream – his biggest holdings in the respective categories are 5% US 30-year Treasuries and 2.7% Filipino government bonds.
“In terms of alternative income the non-mainstream instruments have been very good servants,” he elaborated.
“We do not hold any 30-year UK gilts, and are not interested introducing gilts until they reach 3% at the short end.”
