This week’s blog is written by portfolio manager Ian Jensen-Humphreys
This past week has brought a somewhat welcome respite. We have seen fewer specific events causing large market moves (apart from a brief rumour on Wednesday that President Trump was about to fire the Federal Reserve Chair, Jerome Powell – a rumour that was swiftly quashed). So, how do we occupy our time during these quieter moments as we head into the summer season?
This is an opportunity to review all our existing tactical asset allocation (TAA) tilts within the portfolios to see if they are performing as we would hope and expect. For every new position, we record the rationale using a consistent framework that considers valuations, flows, and technical analysis, alongside both macroeconomic and company-related data. We also try to think of what developments might cause our views to be wrong, and a tilt to underperform.
When we review a position (for example, an overweight tilt to Japanese equities), we look back at our original analysis and see to what extent we were correct. If our thesis relied upon strong earnings growth coupled with cheap valuations, how have earnings delivered over the intervening period? Does the market still look cheap compared to other regions? If a risk was that the central bank might raise interest rates, has that happened? If so, how did the market react?
The result of any review could be to reduce, maintain, or increase the position. This will depend on whether we think it is still attractive based on our analysis. One of the risks we want to avoid is to hold on to losing positions whilst backtracking on the rationale. For example, ‘we bought this because we thought earnings would grow… they haven’t grown, but now it looks cheap… we should still hold it!’ This is more likely an unwillingness to admit to a mistake rather than clear and logical analysis.
A core part of our role is to allocate investments to high-quality, specialist managers who can deliver outperformance in their specific area of expertise. Quieter moments give us, and our manager research team, the opportunity to touch base with our managers to see how they have navigated recent turbulence and to check that they are managing their funds as we would expect. This is as much about process as performance. When we allocate to a manager, we are making the judgement that they have a robust process that should help them deliver repeatable strong returns, as opposed to simply having been lucky in the past.
Whilst we would love for all our managers to outperform all the time, we recognise that is clearly unlikely. Therefore, our evaluation is (i) do we still believe that the manager’s process can deliver strong returns through time, and (ii) are they consistently following that process? Ironically, good performance can occasionally be a cause for concern if returns are generated for the wrong reasons. For example, a value manager outperforms because they have been sneaking growth companies into their funds.
We are always looking for new ideas, and ways to improve returns and mitigate risks. These can be either new tactical tilts or new managers and funds. We also spend time going through recent academic research, for example relating to portfolio construction, to see if there are any practical insights we can apply to the portfolios.
Meeting new managers is another crucial input to help us build a picture of all the options available to us. Sometimes we meet existing managers in new locations; other times, it’s managers from different regions looking to expand their investor footprint into the UK. It is important for us to always have a ‘bench’ of potential alternatives in case we lose conviction in any of our existing managers. We can also gain interesting insights from their macro views that can help inform our tactical asset allocation decisions.
Given the volatility in both politics and investment markets recently, quiet weeks are great opportunities to review and adjust the portfolios. They allow us to be well-placed to take advantage of the inevitable next period of volatility and the opportunities that may emerge.
Ian is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Ian joined Quilter Investors in March 2020 from Seven Investment Management (7IM), where he was deputy chief investment officer. Ian also spent 15 years at Goldman Sachs in risk management and portfolio hedging strategies.
Ian is a CFA charterholder and has a degree in Physics from the University of Oxford.
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