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Asset allocation: L&G opens up lines of Fed communication

Legal & General multi-index fund range co-manager Justin Onuekwusi prepares for a dramatic equity markets drop 

Justin Onuekwusi
Fund manager Justin Onuekwusi

Legal & General Investment Management fund manager Justin Onuekwusi plans to sell down riskier assets over the coming months ahead of a possible correction.

Onuekwusi, who co-manages the L&G Multi-Index fund range alongside Bruce White and Martin Dietz, expects equity markets to drop dramatically when the US Federal
Reserve eventually increases interest rates.

Onuekwusi says: “Whenever communications like this happen, the equity market usually falls around 8 per cent – but given we are in a low-yield environment, it could be a bigger fall.

“You can expect in the next few months to see us selling risk assets on strength, meaning as they start to perform better we will start to sell them off a bit more. 

“We did learn last summer when we had the ‘taper tantrum’ that the market can move very quickly when it misinterpreted the Fed communication.”

Riskier positions

Onuekwusi has developed riskier positions within his fixed-income exposure. In the hunt for yield, he has broadened his horizons geographically and currently has an overweight to short-dated corporate bonds.

He says: “At the end of last year we increased our allocation to high-yield debt. Then at the beginning of this year it was looking expensive so we swapped this out with emerging market debt. Now EMD yields are starting to fall so the latest thing we have done is to include short-dated corporate bonds to manage interest rate risk.”

But with uncertainty looming, Onuekwusi is preparing to rein back exposure to the riskier parts of the fixed income universe and allocate some capital to “safer regions” such as the UK.

Onuekwusi works with a team of 28 people who build the portfolio around the risk profile predetermined by Distribution Technology . Once a long-term asset allocation view is created, this is then populated with funds and manipulated to accommodate medium-term risks on a one- to five-year timeline.

The multi-asset range is predominantly created from passives but Onuekwusi says the firm will cons-ider active funds too.

“We are going active with UK property because you cannot really access it through a passive, and we are active in high yield too,” he says. “In terms of active funds we use the £1.5bn L&G High Income trust and the £1.3bn L&G UK Property fund.”

As for UK exposure within equities, Onuekwusi has a larger weighting towards international equities but recognises the importance of the UK within the portfolio.

He says: “With equities, it is important first of all to diversify equity allocation geographically, so I do not have concentrated regional exposure.

“But it is also important to recognise retail investors in the UK do have a structural bias towards UK companies, so it is still our highest regional weighting.

“Year to date UK equities have performed quite poorly due to a strong sterling and overseas equities have performed better.

“We are at a point where UK equities might start to look interesting again.”

The portfolios are slightly underweight cash at the moment but in the build-up to the end of the Fed’s QE programme, expected in October, Onuekwusi expects this to creep up as the fund manager secures the portfolio for possible volatility.

Onuekwusi sees UK property as an opportunity and has maintained an overweight position in this asset class as he expects the economic recovery will continue to gather momentum.


Pretty positive

“We are pretty positive on UK property,” he says. “We saw green shoots in the UK market towards the end of 2013. We are starting to see income growth in both prime and secondary property and capital values increase.

“That recovery has now got real momentum. Property has been a really strong performer and the capital values are increasing. Also, property transactions outside London have started to increase. 

“This has given the property recovery real balance.”

Despite some industry commentators raising concerns about a property bubble, Onuekwusi insists the sector remains viable.

He says: “We often get asked if this property story is overdone. But look at commercial property values now and we are still not at the highs we saw in 2006 and 2007. Also you have to remember the UK economic backdrop is a bit stronger this time around.”

On alternatives and commodities,  Onuekwusi understands why some managers prefer to hold them but does not have exposure within his portfolio.

He says: “Alternatives can play a role in multi-asset portfolios. Commodities in particular we feel have not really provided diversification since the crisis because they have become more correlated with equities. 

“And due to concerns around world growth, they have also seen a flood of money.”


About the L&G Multi-Index fund range

Launching in August 2013, the L&G Multi-Index fund range is made up of the £6m L&G Multi-Index 3 fund, the £15m L&G Multi-Index 4 fund, the £20m L&G Multi-Index 5 fund, the £12m L&G Multi-Index 6 fund and the £4m L&G Multi-Index 7 fund. Co-managed by Justin Onuekwusi, Bruce White and Martin Dietz, the funds are risk profiled by Distribution Technology and can hold a variety of assets including cash, equities, fixed income and direct property. The range is fettered but can invest externally in extreme circumstances.


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