Walker Crips Investment Management executive director Chris Kitchenham says the ability to protect clients’ money as the threat of rising interest rates looms is a major theme for its Actively Managed Portfolio Service.
He says while bonds are supposed to be the safe haven for portfolios, traditional strategies are likely to falter once the Bank of England hikes rates from their record five-year low.
He says the ability to get allocated shares in a new low-duration fund which buys quirky but solid bonds with high interest rates ahead of other managers gives the company the edge.
The Actively Managed Portfolio Service bought into the £107m TwentyFour Select Monthly Income Fund ahead of its March listing because of the investment trust’s approach.
As an investment trust, the fund can buy illiquid bonds issued by governments and companies outside of usual tranches without having to worry about trying to sell them when investors want to exit.
Most of the portfolio’s bond exposure is in flexible “go-anywhere” funds that are not constrained by having to have certain holding and change their duration risk.
These include the L&G Dynamic Bond and Alliance Trust Monthly Bond funds which are actively reducing their duration.
The M&G Global Macro fund is also managing its interest rate risk, and has the added bonus of about 83 per cent of its assets in US dollars, Kitchenham says. He expects a “long-term tailwind” for the dollar due to the effects of tapering the economic boost from fracking.
Another fund Walker Crips bought in to before the market was the Tritax Big Box real estate investment trust that launched in December.
Kitchenham says: “We are a stockbroker, rather than an asset manager. We were not waiting for the first price in the morning to press the button, we were already committed.”
The Reit owns several distribution centres for blue chip corporates that are locked into long-term leases offering a 6 per cent yield, and clients include Sainsbury’s, Tesco and Marks & Spencer.
It ties in with Walker Crips’ view on how consumers’ buying habits are changing. Kitchenham calls it the “Amazon effect” – whre growth is driven by central distribution hubs servicing online shopping.
The Actively Managed Portfolio Service committee is bullish on commodities due to a renewed focus on dividends and return on equity from minerals giants.
The intermediate portfolio has 2.8 per cent in gold as a “disaster come serious bad news hedge”, and 5 per cent of commodities exposure is in the BlackRock World Mining Trust, the portfolio’s largest holding.
“In the last few years there has been a run down in inventories. At the top of the last cycle there were a lot of inventories at a time of falling demand.”
Since then mining companies have been stripping spending budgets and mothballing mines to boost cashflow. Meanwhile industrial consumers have been running down stockpiles and easing the supply/demand issue. Kitchenham says: “Because of that we think commodities and mining equities are a good place to be this year.”
He is also tipping frontier markets such as Qatar, Nigeria, Saudi Arabia and Bangladesh, which he says have been relatively insulated from the capital flows that have hit some emerging markets.
Kitchenham says these countries offer returns that are uncorrelated to developed markets and thr emerging markets that are increasingly linked to the west.
He adds these areas are also under-researched and insulated from the volatility that haunts emerging markets.
He says: “In the past a lack of dividends has meant people stayed away. Now the BlackRock Frontiers Investment Trust yields 2.8 per cent, and we think the dividend will grow.”
Kitchenham says he would like to allocate more capital to frontier markets, but due to risk management constraints the portfolio is unlikely to take on more than 2 per cent.
Elsewhere, Kitchenham says infrastructure has become overbought, with yields starting to suffer with most investment trusts moving to premiums.
He believes the pound, too, is “overvalued, and likely to come down” and says the company is “introducing some things we think are relatively low risk to get out of sterling.”
These include investments in Australian government bonds – one of the few AAA sovereigns left – as well as Norwegian krone.
He says: “While we have been busy talking about UK deficits, in the last seven years the smallest budget surplus in Norway has been 10 per cent.”
While the firm is bullish on the United States and has been overweight the country for some time, Kitchenham believes the market is beginning to look “toppy”.
He says: “We will look closely at the US allocation in the next few months and look to recycle it elsewhere.”