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Asset allocation: Whitechurch Securities diversifies to fight volatility

Whitechurch Securities has battened down the hatches on its Income & Growth portfolio to protect against the volatility surges it expects will continue.

The firm’s head of research Ben Willis says the risk 4 portfolio has a broader range of funds now and a solid core of funds grinding out returns with low-volatility.

The portfolio has 20 funds – four more funds than a year ago – with additions to property and other alternatives that are likely to dampen volatility and offer a reasonable income, he adds.

“We have to keep a close eye on what risk assets we run this year. We’re trying to increase diversification,” Willis says.

The portfolio aims to deliver returns of around inflation plus 2 per cent.

Willis expects volatility to hit markets in ferocious bursts, as it has this year, so Whitechurch is positioning the portfolio to deal with blips of ruction while generating sustainable longer-term returns.

“I think it’s in pretty good shape for what’s likely to be a significantly more challenging environment going forward.”

Delivering a reasonable return while keeping risk low is difficult in today’s world, he says.

“Bond funds have helped: in the past few years you could have invested anywhere in the bond markets and got a reasonable return. And equities have had a great run as well.

“It will be more difficult to generate those kinds of returns and decent yields in the future.”

Infrastructure was a theme that worked well for other strategies and has been brought into the lower risk Income & Growth portfolio as a source of income, capital stability and inflation hedging.

Whitechurch is bearish on bond funds and has trimmed its holdings. However, Willis says it is necessary to hold some in the portfolio due to its low-risk approach.

Alternative return strategies have been used as “bond proxies” in the past year.

“We increased exposure to them last year and this year, but some haven’t been working so recently we traded them and put it into low risk stuff,” he says.

Willlis says the team is erring toward multi-asset funds with derivative exposure, rather than market neutral or directional funds, which have disappointed lately.

However, the multi-asset £239.5m Jupiter Absolute Return fund has not benefited from the new management of James Clunie, who took on the fund from Philip Gibbs in September last year.

The fund has shrunk considerably – it was £742m in October 2012 – and has returned just 3.46 per cent over the three years to 19 November, undershooting its peers by 7.8 per cent, according to FE Analytics. 

The absolute return fund was swapped for the lower-risk £84.2m Jupiter Strategic Reserve fund, which has ultra-low volatility at 1.61 per cent over the past two years and a maximum drawdown of just 1 per cent.

A long-held position in the Ignis Absolute Return Government Bond fund was terminated after Standard Life Investments took over its management.

“It’s had the guts ripped out of it, so it was an easy decision to move out,” Willis explains.

The position was switched to the Invesco Perpetual Global Targeted Returns fund, accompanying SLI’s Global Absolute Return Strategies in the portfolio.

The Odey UK Absolute Return was trimmed, but it remains within the portfolio and is counted as equity rather than alternatives exposure because of its heavy bets.

The portfolio has an equity ceiling of 35 per cent, however just 26 per cent is allocated to them at the moment. 

The fund retains 7 per cent in cash for liquidity and to lower overall risk. That allows Whitechurch to buy riskier funds in a search for yield without compromising the portfolio’s risk budget.

Some 5 per cent of the cash is held in the Premier UK Money Market fund – an option created by the Isa changes – to “sweat” out more returns, Willis adds.

“We’re pretty well-rounded at the moment. We’ve added those positions and don’t want to be adding too many more as you don’t want our views to be diluted too much.”



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  1. I am a loss as to how they will predict inflation for the year ahead even the Bank of England has failed to do this for years?

    The risk profile of investing while inflation is under 2% is very low – bonds and many income funds can manage that but for a long term investment measured in years for sure inflation will rise – no doubt their target will have to be changed then – simple really.

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