Asset allocation: Chase de Vere’s Connolly backs strategic bonds amid monetary policy uncertainty

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Chase de Vere’s Patrick Connolly admits he is “more nervous about fixed income than anything else”, given that global markets are on tenterhooks over when monetary policy will eventually start to tighten.

As result, the certified financial planner says he is pretty much exclusively using strategic bonds funds, “run by managers with good track records” for fixed income exposure.

He highlights Philip Milburn and David Roberts who manage the £659.6m Kames Strategic Bond fund and Ariel Bezalel, who is responsible for the £2.6bn Jupiter Strategic Bond fund, as the types of managers he currently putting his faith in.

While the firm does not offer off-the-shelf model portfolios, Connolly says for a balanced investor he typically recommends an asset allocation split of around 50 per cent in equities, 15 per cent in commercial property and, despite his reservations, 35 per cent in bonds.

Connolly highlights the potential double-whammy that lies ahead for investors, in that at some point interest rates are going to rise and central banks will stop being so accommodating – neither of which bode well for bonds.

He adds: “There are potential liquidity risks too, if too many investors head for the exit at the same time. Our fixed income allocation is more about protection on the downside as opposed to maximising investment returns. With our client portfolios we are trying to position them to be able to deal with whatever happens in the future.”

Within his equity allocation, Connolly says the breakdown is generally 12 per cent of the portfolio in the US, 20 per cent in the UK, 8 per cent in Europe and the remaining 10 per cent spread across Asia and emerging markets.

He admits he is more concerned about the US than the UK and Europe., but adds that this anxiety is really down to valuations.

“Then again,” he notes, “the US is usually always over-valued in comparison to Europe and the UK,” he notes.

“But it would be very usual for us to have more in Europe than in the US. The potential in the US of course is still there, as it is the primary driver of the global economy, and many companies there will do fantastically well.”

However, his exposure there has come down over the past few years, but “only marginally so. At the very top end it would previously have been circa 15 per cent,” adds Connolly.

While his biggest “balanced investor” equity exposure, at 20 per cent, is in the UK, looking at the current backdrop Connolly says it is “very difficult” to anticipate where the market could go from here.

He adds: “Our outlook at the start of 2015 was conservative and then the market rose only to subsequently fall back. I would not be surprised to see it rise or fall 10 per cent from here.”

With just three per cent in global emerging markets Connolly is not overly bullish on the region, a feeling echoed by many of his peers given that the strong US dollar and threat of tighter monetary policy is weighing down on sentiment.

However, Connolly believes there may well be some light at the end of the tunnel, although he too is waiting for it to show.

He says: “Sentiment has been terrible for some time, emerging markets have underperformed western markets for some five years or so. But from a pure valuation perspective, you could make the case that there is an opportunity to be had. But the market is waiting for some catalyst.”

As a result of the divergence of fortunes across the region, he only uses broad global emerging market vehicles, such JP Morgan Emerging Markets, to access the asset class.

Commercial property has endured its bad times but more recently, unlike emerging markets, has been enjoying a particularly purple patch. Reargless Chase de Vere has been a consistent holder of the asset type.

Worries are however beginning to creep in once again given the amount of cash that has flooded into bricks and mortar funds.

Connolly agrees that there are risks at the moment, given that a lot of money is looking for properties at the right price. He says: “Some fund managers have moved more into the secondary market, away from prime to find value while others have stayed in the prime market with the knowledge that they are going to be paying a higher price.

“But overall it is a good diversifier, it pays an income and long term should provide some growth.”