The Premier Multi-Asset Monthly Income fund has made use of market volatility ahead of and following the Brexit vote to switch into some undervalued holdings, believing many UK equity assets have been oversold.
Ian Rees, head of research for multi-asset funds at Premier Asset Management, says that the fund took advantage of drops in equity markets at the start of the year, as Brexit jitters hit markets, and has capitalised on the volatility since the EU referendum vote last week.
Rees says the management team went into the year very cautiously and retains that position now, but it made use of some of the market yo-yoing around last week’s EU referendum vote.
He says: “We had a fairly cautious view on life going into the year, simply because we could see markets had gone a long way fast and earnings growth was really a struggle for corporates, so we were getting a bit of re-rating in the market.”
However, the fear ahead of the Brexit vote this year created a buying opportunity in equities generally, and specifically in UK equities, says Rees. “There was a bit of panic out there. We took advantage of much cheaper prices and so edged up equity allocations, that was pretty broad brush.”
The team behind the £517.9m Multi-Asset Monthly Income fund maintained the position for around six weeks, before markets rebounded, leading them to sell out of the equity positions and return to the year-start portfolio makeup.
In the days following the Brexit vote the fund once again moved into UK equities, which were hit the hardest in the market falls. “We reduced our emerging market equity holdings and shuffled over to UK equities, which were being hit,” says Rees.
The fund now has a 28.7 per cent allocation to UK equities, with 4.9 per cent in the Fidelity Enhanced Income fund and 4.8 per cent in the Rathbone Income fund.
Rees thinks there are opportunities in UK large and small caps post-Brexit. “Large cap equity looks interesting, because it is not very UK-centric with three-quarters of its earnings from overseas. The huge amount of earnings coming from the dollar really helps UK large caps benefit from sterling weakness,” he says.
Because of this Rees predicts some UK large caps could raise their dividends, purely on the basis of their dollar reporting.
However, he is also not dismissing UK small caps, which he doesn’t think are as exposed to domestic UK as many perceive. “Undoubtedly managers are going to find real gems through the carnage,” he adds.
The team’s caution about markets spreads to the fund’s property allocation, which was dialled back earlier this year and then cut further on the Brexit result. The team moved the allocation from 12 per cent at the start of the year to 11 per cent ahead of the vote, but cut that further to 6 per cent following the referendum.
In particular, the team has sold the open-ended funds, such as Aberdeen and Henderson’s property funds.
“We still have a positive view on property but as a relative opportunity, actually being able to sell those property funds, which done have done a fantastic job for us, enables us to buy much weaker equities, which is quite a compelling trade,” says Rees. Post-Brexit he says there is “limited upside” in the asset classes and a “lot of opportunity to increase yields elsewhere”.
The team has also banked some gains made in its alternative income sources, such as its infrastructure allocations. Rees argues that the volatility in the markets, while not having a direct impact on infrastructure investments, has led to more interest from investors in the asset class.
“Because of the volatility investors were keen to continue support for those vehicles. We used some price gains and a lot of healthy interest there to exit that position at a good level,” he says. The fund sold its 1.5 per cent position in the International Public Partnerships fund.
It still has 4.7 per cent of the fund in alternative assets and has maintained its positions in the SQN Asset Finance Income fund, which makes up 1.5 per cent of the portfolio, and the 1.3 per cent invested in the Bluefield Solar Income Fund.
The Multi-Asset Monthly Income fund is run by director of multi-asset funds David Hambidge, with support from Rees and investment managers David Thornton and Simon Evan-Cook. The fund has delivered a historic 4.8 per cent annual yield, paying the income monthly.
It sits alongside the Multi-Asset Distribution fund, also run by Hambidge, which has a lower income target and more of a focus on capital growth. The two funds are run to similar investment outlooks but the Monthly Income fund has a higher allocation to bonds, in order to meet its higher income target. It also has more in UK and European equities, which tend to pay higher dividends than their emerging market and Japanese counterparts.
Despite its higher bond allocation, Rees says the team does struggle to find alpha in the conventional corporate bond market, saying there is a “dearth of liquidity there, meaning managers fund it ever more difficult to be nimble enough to generate strong alpha”.
The team cut its investment grade corporate bond funds after the Brexit vote, reducing the position by around 1.25 per cent, with the relative safe-haven assets seeing decent gains post-Brexit. The team has also reduced the high-yield bond exposure on the fund following Brexit by around 1.25 per cent, thinking the area was more vulnerable compared to other bonds markets, and more correlated to equity markets.
For now the team has raised its cash levels and is waiting for more opportunities as markets re-price. The cash allocation has risen from 2.7 per cent to 7.5 per cent, mostly due to the sellout in property.
“There is a bit of turbulence in markets and we want to see what opportunities that provides us. The cash position has given us flexibility now to deploy it and put it to work when we see good ideas,” he says.