GB-EN Intermediary

Reducing risk in the portfolios

We’ve been working on de-risking our portfolios and have increased our exposure to market-neutral absolute return funds. We explain why and take a look at one of our holdings.
October 2021

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Sometimes the success of a portfolio can be as much about what you take out as what you put in. With this in mind, we’ve recently been applying ourselves to the task of gradually ‘de-risking’ our positions, reducing exposure to volatile movements in the wider market.

We’ve pared back our holdings in equities, taking the view that, with prices of certain stocks looking fully valued or in danger of getting overheated, it’s time to take some profits.

After a wave of companies suspended their forward guidance during the depths of the pandemic, a large number of analyst estimates proved to be too conservative. Against the backdrop of recovering markets, many companies have enjoyed a subsequent cycle of profit upgrades, having substantially beaten consensus forecasts.

Tougher times ahead

However, we think the macroeconomic picture is starting to look a little more challenging, with rising inflation, the approaching end of government stimulus and, at some point, the prospect of interest rate rises. In our opinion, this is going to make it even more difficult for companies to beat their historical earnings in the near term, particularly when their comparable figures have already been strong.

We’ve also trimmed our exposure to credit. After the sharp sell-off in March 2020, corporate bond prices were offering very good value and we increased our holdings. That attractive window of opportunity shut quickly, however, and as the returns were beginning to lose their lustre, we again took profits on some of our positions.

A time for stock-pickers

With beta having been a large part of an investment’s total return over the recent years, we think this is a time for an active, stock-picking approach to come into its own. As a result, we’ve been adding to market neutral absolute return funds, which are designed to do well irrespective of wider market rises or falls and should benefit from the manager’s individual stock choices.

We now have three absolute return positions: Jupiter UK Specialist Equity, Man GLG Absolute Value and Tellworth UK Select. All of them are market neutral, but they each have very different styles and approaches.

Tellworth UK Select

The Tellworth UK Select fund has been managed by Seb Jory and John Warren since the end of December 2019, after the previous managing firm, Sanditon, was wound up. Until then, the fund’s track record had been indifferent, but it has been a stellar performer since.

The fund looks to exploit opportunities by taking both long and short positions which when aggregated at the portfolio level, result in a broadly market neutral portfolio.

It is the first fund that Seb has overseen since he joined Tellworth from Liberum, where he was head of strategy and stock selection, and it uses a variety of the data-driven investment systems that he developed while he was there.

We invested in Tellworth UK Select following detailed meetings with both managers, during which we got to explore their investment models and their environmental, social and governance processes.

We’re pleased that we were able to invest at an early stage in the fund’s recovery, since when it has delivered a return of 20%, with very low levels of volatility.

Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation. Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

Use our handy glossary to look up any technical terms you are unfamiliar with.

Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation. Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

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