Columbia Threadneedle on political flashpoints and Brexit’s unexpected casualties

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Columbia Threadneedle portfolio manager Maya Bhandari does not think the effects of Brexit have materialised yet.

The Dynamic Real Return fund she works on as deputy manager, alongside lead manager Toby Nangle, saw a number of changes before and after Brexit vote and now it is seeking opportunities in Europe, in particular in equities and high yield, says Bhandari.

Bhandari says: “Before the EU referendum we positioned the portfolio so that it would neither be positively nor negatively impacted by the result.”

The team started reducing the overall risk within the portfolio before the 24 June vote, clipping back exposure to European equities.

Before the referendum the team also reduced exposure to UK small caps and Japanese equities, as well as removing the currency-hedged allocation within Japanese equities. They also built a non-sterling exposure to protect the fund in the event of a Leave outcome.

After the Brexit vote, Bhandari says the £280m fund mainly comprises four themes, with 20.9 per cent allocated to earnings growth exposure, 17.6 per cent in emerging markets assets, 39.7 per cent in short duration assets and 21.8 per cent in Eurozone risk assets.

Within these themes, after the EU referendum the team increased the UK short-dated corporate bond and UK large-cap equity exposure, as well as the US dollar exposure via hedging some of the UK equity allocation.

The managers have also reduced the commodity exposure and completely cut the property allocation targeted through Columbia Threadneedle’s property fund, which has been suspended since July due to a large number of redemption requests from clients.

Those positions were then allocated to “more attractive” Mexican government bonds and cash, which went from 5 per cent to 12 per cent right after the vote and has now been increased further to 15.8 per cent.

At the moment, government bond exposure is predominantly in Australian and Mexican government bonds at 3 per cent and 9.3 per cent respectively.

She says: “Mexico was one of the unexpected casualties post-Brexit. The Mexican peso has a very low correlation with sterling and you currently can get a nice yield of between 5.5 per cent and 5.9 per cent.

“Mexico is one of the better placed emerging markets as it has been through a lot of structural reforms, similar to India. As soon as the oil price weakened last year the Mexican currency suffered so we saw more value opening up.”

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Overall, the fund is mainly invested in in-house funds but has some direct holdings in fixed income and targets companies and countries where profits are underpriced.

Within the fixed income portion of the fund, the team selects individual bonds based on their return and diversification features rather than invest in a particular fund.

The equity side of the fund, which has a total exposure of around 28 per cent, is more orientated to Europe, UK large cap, and Japanese equities, accounting for 9.3 per cent, 7.7 per cent and 10.3 per cent of the portfolio respectively.

Bhandari says while UK large caps have gained post-Brexit because of overseas profits, Japanese equities continue to be one of the favourite calls for the managers.

On the other hand, the emerging market equity allocation has gone from a broad exposure in the past two months to one that is now solely focused on Indian equities.

Indian equities represent 2.5 per cent of the fund and have been increased from 1.5 per cent in that period.

The Dynamic Real Return fund reached its three-year milestone at the end of June, and has consistently outperformed its sector since launch. It has returned 20.7 per cent over the past three years compared to 8.3 per cent returns of the IA Targeted Absolute return sector, according to FE.

Bhandari says: “At the moment we are really targeting the asymmetry between asset classes.”

This strategy is based on a dynamic asset allocation that aims to protect investors’ capital when the market presents more challenges.

Bhandari says: “If equity markets are up 20 per cent, a positive result for the portfolio would be up around 12 per cent. Instead, for example, when equity markets are down 20 per cent then a result for the portfolio would be down 5 per cent.”

Looking ahead, Bhandari says the triggers to look at within the market are politics as well as volatility.

She says: “There are plenty of flashpoints at the moment. It is a goldilocks world where you have an increasing banking easing and monetary policies, but I am sceptical of this.

“Also, some people say Brexit is behind us but Brexit has not yet started. The same applies to worries about China, which seems to have faded away but the underlying challenges do persist.”