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Investment Quorum guards against volatility with inflation-linked bonds

Investment Quorum has allocated more exposure to inflation-linked bonds as an insurance policy for
potential volatility later this year.

In order to make the move, the firm has taken some profits from its overweight to equities across its six portfolios.

Investment Quorum chief investment officer Peter Lowman says he would rather make the change now before it is too late.

His rationale for being cautious stems from the current optimism surrounding the UK’s economic recovery, with more positive UK forecasts from the International Monetary Fund and improving economic data more generally. 

Lowman says: “We have picked up a little bit of fixed income and added 4 per cent to our IQ Balanced Portfolio through UK inflation-linked bonds.

“Even though inflation is benign, we believe it could pick up along with possible rate hikes.”

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But Lowman is not buying into the wider fixed income space, with no government bond holdings as he judges them too expensive. He prefers his fixed income exposure to be more flexible.

He says: “We buy strategic bond fund managers – that flexibility is very important to us.

“We have had a bull market in government bonds for a while now but we are currently going into a more equity-like territory.”

As a proxy for government bonds, the firm has allocated some exposure to commercial property due to the yields the sector gives. Lowman says commercial property is becoming a favourable
asset class to own, with Investment Quorum allocating 5 per cent to sector.

As for active fixed income, the firm’s balanced portfolio has allocations to the £857m M&G UK Inflation Linked Corporate Bond fund, the £869m Old Mutual Global Strategic Bond fund and the £107m Old Mutual Monthly Income Bond fund.

Overweight to equities

Investment Quorum continues to hold overweights to global equities within its portfolios.

In 2012 the firm took capital from a significant overweight in bonds and reinvested it into equities in time for an equity bull run to begin.

Lowman recently took the decision to take some profits from his equity exposure in order to buy inflation-linked bonds.

“We have also bought some absolute return funds. We want some insurance cover, hence the move. If we see corrections in the market, absolute return funds smooth this out. So we allocated 10 per cent to abso-
lute return.”

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Lowman has 10 per cent in UK equities in the balanced portfolio.

He says: “We are quite relaxed about the UK market because among the developed markets the UK benefited from being out of the euro and other European problems.

“We also have a good Chancellor who has introduced austerity measures that, despite being unpopular when first announced, are delivering and we are seeing growth coming through.”

In terms of accessing the UK recovery story, Lowman prefers buying into active fund managers than index tracker funds or the equities themselves. This has been done in response to the strong rally of equities which has pushed valuations up across the stocks universe.

Lowman says: “We have had a big rally and this is where stockpickers come in simply because there are still pockets of value out there.”

The active equity funds in the firm’s balanced portfolio includes allocations to the £2.5bn Majedie UK Equity fund, the £1.2bn Investec UK Special Situations fund and the £649m Schroder UK Alpha Income fund.

Emerging potential

Investment Quorum has avoided
exposure to commodities.

Lowman says: “We had a substantial weighting to commodities a number of years back when
markets were healthy, predominantly to base metals such as zinc and copper.

But as we went through the crisis and saw a slowdown in China, we have backed out of pure commodity plays.

“I suppose we might have it again once there are better prospects.

“It is a China story to be honest which is not good at the moment.”

Emerging markets have not featured as Lowman looks to prioritise developed market equities over emerging markets, which have suffered from volatility and outflows.

But Lowman says he may be willing to invest in emerging markets
as valuations have dropped.

He notes emerging markets have been experiencing net inflows in the past three months, a stark comparison to the severe sell-off they experienced last year.

Lowman says: “Developed market equities may well do better for the rest of the year but there will be some interesting entry points back into emerging markets.

“We see these entry points coming up and we might be adding to our current 4 per cent Asia exposure. 

“Meanwhile Frontier Asia looks quite attractive while other areas can be quite commodity driven.

“It is interesting to see people are potentially warming to emerging markets again but there are still risks.”

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