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Asset allocation: Why Montage is sticking with the US, for now

Montage Portfolio Management managing director and portfolio manager Peter Montague says he still sees value in US markets despite many saying the country’s stocks are now looking overvalued.

In June, the Essex-based wealth management firm launched a discretionary fund management service that is set to roll out to the wider adviser market before the end of the year. Prior to this the business has run the portfolios for its own clients.

Montague is overweight on US equities although some claim the country’s stocks are expensive.

“The stocks are a little expensive although firms and the economy in the US continue to perform strongly, which is why we have maintained our overweight allocation at our recent asset meeting,” Montague says.

He adds that the effect of tapering the US quantitative easing programme is unknown.

“We do acknowledge that the impact on markets of the ending of QE is as yet unknown so while we like it, the country continues to be under review and it is possible the US could come down dependent on the reaction.”

UK equities have remained neutral in the portfolio and Montague is looking towards value equities rather than large caps.

“We like old-school equity income funds, which provide a bit more stability,” he says. “We are currently neutral on mid and small caps when it comes to UK equities and we are looking at value equities rather than large caps.”

His outlook on Europe is downbeat, perhaps predictably following the latest round of weak growth figures from the European Central Bank.

“The weakness of the euro combined with weak economic data makes European equities look relatively unattractive. It is difficult to say what will happen with Europe. Governments across the continent have fallen like flies and few are cohesive, so we see continuing difficulties in those areas. Germany is of particular concern.”

Another overweight position is in commercial property and although Montague has just trimmed the allocation, it remains a key holding within the mid-risk portfolio.

“We have slightly trimmed commercial property. It has been hugely positive for some time and has run some huge numbers so we have taken a bit of profit in that area. The commercial property sector had taken a kicking for some time so it had a long way to come back.

“Currently the market promises to extend beyond London and the South-east, which is a cause for caution rather than concern but as we are invested in unitised funds they should be diversified enough.”

Montage’s property exposure is led by a 4 per cent position in the £3.4bn M&G Property Portfolio.

Rough commodities

The firm is underweight in commodities and Montague says there could be far worse to come from the sector.

“Commodities are just rough,” he says. “Given the negative data out there, the consumption of them is unlikely and the chances of them being strong is unlikely. We are not buying into them at all and there is far worse to come.”

Predictably, Montague is staying away from index-linked gilts and long gilts, which remain unattractive.

Corporate bonds are heavily favoured by the firm, with some 11 per cent of its PM060 portfolio being allocated.

Montague says: “Yields remain attractive within investment grade corporate bonds. Covenants remain strong and rates remain low and obviously they are a better place to be trying to get some yield and return than gilts.”

The firm has reduced its exposure to pure high-yield bonds by replacing the Kames High Yield Bond fund with the Fidelity Strategic Bond fund. 

It has also swapped the JP Morgan Income Opportunities fund with the Kames UK Absolute Return fund.

The £1.5bn Fidelity fund is managed by Ian Spreadbury and has returned 40.84 per cent over five years compared with an IMA sterling strategic bond sector average of 37.63 per cent.

The newly installed £339m Kames fund is managed by David Griffiths and David Pringle, and has returned 15.43 per cent since inception in March 2010 compared with an MA Targeted Absolute Return sector average of 12.96 per cent.

“With regard to high-yield bonds, we have just been careful and moved from pure to a more strategic position because there is concern about tightening yields on high-yield bonds but rising defaults are coming so we are being less high yield and more strategic,” Montague says.

The firm is neutral at the moment on cash, holding around 3 per cent.

Outside of the mid-risk portfolio, Montague says the firm has, within its high-risk portfolio, taken profits on frontier markets by selling out of the highly profitable Schroder Frontier Markets Equity fund.

The fund has returned some 60.29 per cent over the last three years, compared to a 6.14 per cent FO Equity Emerging Markets sector average.

The fund is managed by Rami Sidani and has been the top-performing fund in its sector over one and three years.

Montague says: “Within the highest-risk portfolio we have just sold out of the Schroder Frontier Markets fund that has made a stonking amount of money but we felt it was time to take the profits.

“We have just swapped that for the JP Morgan Emerging Market Income fund.”

Montague also points to holding the Old Mutual Global Equity Absolute Return fund, which has produced strong returns for Montage’s higher-risk portfolio.

The fund has returned some 37.75 per cent over five years compared with an IMA Targeted Absolute Return sector average of 13.64 per cent.

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