Hung, Drawn and Untriumphant

9 June 2017  |  Adam French
Hung, Drawn and Untriumphant
Strong and stable did not triumph.
The nation woke up to uncertainty this morning as we all wait for the next steps to play out. Our portfolios are prepared for this political turbulence, cushioned by broad global diversification.

The gamble didn’t pay off. The landslide victory that the Conservatives were hoping for has most certainly not come to fruition. Theresa May has promised stability but she is already under pressure to resign. Now the nation will wait as the next steps start to play out – is this the start of a possible coalition? Sterling has fallen sharply on the news but UK markets are up marginally. Uncertainty isn’t generally considered a positive when it comes to the markets.

Our Positioning in the Lead-Up to the Election

We thought that investors may be interested to know about our positioning since the end of March. Both the FTSE 100 and the S&P 500 have generated positive returns over the past couple of months despite the political uncertainty. In the lead-up to the general election, the main changes to our asset allocation have been as follows:

The Changes Made to Our Asset Allocation from 31st March to 8th June 2017

Changes in Weightings Towards the UK Have Been Muted

 Changes Made to Our Asset Allocation from 31st March to 8th June 2017

Past performance or future projections are not indicative of future performance.

  • Our overall allocation to lower-risk assets such as bonds and cash decreased over the period.
  • We increased our exposure to higher-risk assets such as stocks, the biggest lift came from Emerging Markets equities.
  • Exposure to the UK increased through long-term government bonds. Lower-risk portfolios saw a greater increase to this asset class than those portfolios with a higher level of risk.

You can see that the changes in weightings towards the UK are fairly muted. The general election may have caused a stir in the UK press, but our global investment approach isn’t greatly influenced by country-specific politics. Our clients’ portfolios have been carefully constructed to give investors exposure to a globally diversified range of assets and our long-term horizon can withstand short-term market movements whilst the political debate plays out.

A Global Bias

Some investors may be surprised to hear that despite being based in the City of London, our portfolios don’t contain any ETFs dedicated solely to UK equities; an ETF tracking the FTSE is not part of our investment universe for UK-based clients. That decision is down to diversification and how it influences the relationship between risk and return, one of the first rules of investing.

By holding a broad regional balance of assets, the impact of losses in one area will be offset by gains in another. Invest in just one region, and a bad year there will directly translate into a bad year for your portfolio. The commonly used phrase – don’t put all of your eggs in one basket – rings true on this occasion. We don’t want to put all our eggs in the UK and would rather protect our clients’ portfolios from country-specific turbulence. Our clients can rest easy that any temporary political turbulence in the UK won’t damage their long-term returns.

This may all sound unfamiliar to the average UK investor, who tends to allocate about 50 percent of their portfolio to UK equities alone.* However, this seems a fairly high-risk strategy to us – the combined value of the companies on the London Stock Exchange is worth only 5 percent of the combined value of all the companies in the world. Do these UK companies just so happen to be the best long-term investments? Or is it more a case of an investor taking comfort in the familiar? We believe in spreading our risk a little more widely.

No Footsie Here

Dedicated UK exposure isn’t easy to come by anyway. British investors tend to gravitate towards the FTSE 100 (Footsie), but inevitably, these huge companies have a global client base and will, therefore, be affected by global politics, not just UK politics. 77 percent of revenue for the FTSE 100 companies is non-UK.*

Surely then you may ask, what’s wrong with the FTSE if it is so globally exposed? By definition, the FTSE 100 contains exposure to just 100 companies. The average number of stocks in the ETFs we currently hold is 759 with the highest at 1,910 stocks. An investor with a strong bias towards the FTSE will be vulnerable to the fates of those 100 companies. If we wanted access to an ETF with global exposure, there are better ways of doing it than via the FTSE.

Furthermore, the constituent companies of the FTSE 100 do not accurately reflect the global market. It includes an above-average amount of consumer-staple companies like Unilever and energy companies like Royal Dutch Shell which means that other sectors, such as technology, are underrepresented. Due to the low number of stocks and skewed industry representation, on balance, we feel that there are broader, more diversified options for us to include in our investment universe when looking for the best opportunities for our clients.

The Right Balance

We think that the right solution for our clients is a European ETF which contains broad exposure across Europe, including the UK. Of the 527 stocks in our ETF tracking the FTSE Developed Europe index, currently, about 30 percent are UK companies. Switzerland, France and Germany are also well represented.

On top of these 527 European stocks, our portfolios contain exposure to up to a further 7,500 securities. They cover all major asset classes, geographies and sectors which cushions any short-term turbulence caused by domestic politics.

In Conclusion

Uncertainty is not generally considered to be good for markets. There will inevitably be some short-term turbulence until a firmer conclusion is reached. We are confident that by constructing well-balanced, globally diversified portfolios, our clients are protected from the worst of the turmoil.

Source: CPIS, Factset

Image: Unsplash/Ruben Bagues

Risk Warning – With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance. We do not provide any investment, legal and/or tax advice. If this website contains information regarding capital markets, financial instruments and/or other topics relevant for investments of assets, the exclusive purpose of this information is to give general guidance on investment management services provided by members of our group. Please note our Risk Warning and the Website Terms.

 

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Adam French
CO-FOUNDER & DIRECTOR
Adam spent the last 8 years working in London in the financial services industry. As Executive Director of Commodities Trading at Goldman Sachs, he was responsible for the Commodities Structured Products franchise. Prior to this, he worked in Derivatives Trading where he was responsible for electronic trading for private clients in fixed income, currencies and commodities products. Adam studied Business Mathematics and Statistics at the London School of Economics.