Multi-manager Octopus Investments has rebalanced the risk-graded portfolios in its Octopus Portfolio Manager discretionary fund management service back to their target equity weightings.
The team expects global economies to keep growing but possibly at a slower than expected pace. On that basis, it says equities look like a bargain, at least temporarily.
Portfolios with risk profiles three to 10 invest in equities, with exposure ranging from 20 per cent only in UK equities to 100 per cent in global equities. Within portfolios that invest in fixed income and alternatives, Octopus has also reduced fixed-income weightings by 5 per cent and reinvested the proceeds into alternatives.
It believes that sentiment is driving markets but highlights the problem this is causing bond managers. The firm says high inflation and 10-year US Treasury yields falling to record lows at below 2 per cent present a paradox. For Octopus, yields at these levels suggest investors are willing to keep buying bonds because they do not want to be overly exposed to volatility in risk assets such as equities. But the downside is that the real value of their investment will decrease through inflation.
Octopus says this leaves bond managers with the dilemma of following their logic and steering clear of sovereign debt or following market sentiment, which still sees them as a safe haven. Octopus’s reduction in fixed income is modest but reflects its increasing concern about the outlook for fixed income in general and corporate bonds in particular.
Chief investment officer Lothar Mentel says: “We see a stronger investment case for increasing the weighting in alternative strategies, which at the moment offer better returns for similar levels of overall investment risk. We may revert to our original investment profile target weights once a clearer outlook for fixed income emerges.”