Quilter’s WealthSelect Managed Portfolio Service has added to traditional fixed income in its latest quarterly rebalance following the continued sell off in government bonds this year.
Portfolio manager Stuart Clark said that the current economic outlook requires pragmatic caution, as the Federal Reserve looks to pause on interest rate hikes and the market pricing of cuts by the end of the year, predicted recently, has now been replaced by an expectation of higher rates in the short term.
This rebalance increases exposure to traditional fixed income through government bonds, with a greater allocation to gilts than global government bonds, returning to an equal weighting between the two, meanwhile also reducing exposure to cash and alternatives. While the WealthSelect portfolios are neutral on fixed income to their strategic asset allocation, this still leaves them underweight to the peer group with a view to building further exposure if yields do continue to increase to make the most of the defensive, diversifying characteristics on offer.
On the equity side of the portfolios, following a strong start to the year for the Quilter Investors US Equity Growth fund, run by JP Morgan, and iShares North American Equity Index, profits were rotated into areas representing better opportunities. This included increasing holdings in the Quilter Investors US Equity Small/Mid-Cap fund managed by Schroders, the Quilter Investors North American Equity fund run by Jupiter and the Quilter Investors US Equity Income fund managed by Newton Investment Management. This reduced exposure to the mega cap tech names that had done well following the artificial intelligence hype in favour of recent laggards.
Elsewhere, the allocation to Japan via the Quilter Investors Japanese Equity Fund, managed by M&G, was held at a higher level than the start of the quarter in the Managed and Responsible ranges. While a smaller absolute allocation than other developed markets, this is now one of the largest relative overweight positions within the portfolio. This move reflects Japan’s increasing attraction relative to other markets given the potential degree of outperformance from corporate reforms, the end of deflation and having strong manager conviction.
Stuart Clark, portfolio manager of WealthSelect, says:
“The ongoing economic challenges and the continued sell off in government bonds presented a good opportunity to add to our exposure to traditional fixed income, with a particular focus on increasing exposure to gilts and investment grade credit.
“Inflation is not falling as quickly as hoped, particularly in the UK, and as a result central banks have not changed stance as quickly as had previously been expected. The target of the treasured soft landing is akin to landing on a narrow airstrip in the mountains – it will be incredibly hard to achieve and any miscalculation either side could result in significant consequences.
“At a time when there is potential for continued market volatility, fixed income represents a good opportunity for defensive diversification and we have therefore opted to not only add to our exposure in lower risk levels, but also to reintroduce it to risk level 8 for the first time in several years. Going forward, we will keep a close eye on the asset class in anticipation for our next rebalance.”