Close to the hedge

Added 13th September 2016

After a busier than usual summer, Brooks Macdonald has its eyes firmly on the macro picture, while also balancing the right currency calls.

Close to the hedge

Brooks Macdonald’s asset allocation committee usually meets on the second Wednesday of every month but, given the result of June’s EU referendum, this summer has been busier than most with more frequent discussions.

The committee met on the morning of 24 June and recommended to sell down all of the firm’s open-ended property exposure, including L&G and Henderson property funds, as well as a cut in European equities.

A week later it reduced its European exposure some more, as well as UK equities. It also put money into cash and some into investment grade sterling bonds. Then, in July, it cut exposure to Japan and put more money into global equity income.

A key figure in these decisions was Edward Park, an investment director at Brooks Macdonald and a member of its asset allocation committee.

He says: “The biggest question we are now looking at is what will be the macro impact of the referendum. We are forced to make short-term investment decisions based on a medium and long-term unknowns.”

Despite making some reductions to property on the day after the European Union referendum, and the subsequent gating of funds, Brooks Macdonald still has exposure to the asset class.

“We still hold some open-ended funds for clients but it is a long-term investment where we are happy with the yield. But we did reduce our exposure to it because, going forward, open-ended property funds have the additional risk of the fair value adjustment.”

International flavour

Since the domestic outlook is more uncertain in the UK, the firm reduced its exposure and moved to a neutral stance on UK equities. “The FTSE 100 is doing well because of the currency effects but, if we want those currency effects, we can also look internationally” Park says.

Given the ‘new normal’ of low interest rates, and bearing in mind the Bank of England’s latest rate cut to 0.25%, Brooks Macdonald has cut equity risk. “It did provide us with yield but, as equity markets have been driven higher, we have also increased our holdings in investment grade bonds.” 

Park believes there is no point in holding a high cash weighting long term because investors are getting very little in return.

Reducing equity risk is more to reflect the fact that a few of the areas where the firm were getting good yields before, namely UK equity income and property, have become a bit riskier, he says.

The main discussion in the latest asset allocation meeting was around where to get income, looking particularly at UK fixed interest and global equity income. The European Central Banks does not seem likely to raise rates anytime soon, nor it seems will the Bank of Japan or the Bank of England.

Park doubts whether or not central banks have what it takes to take them to the “next level”. He says: “What we have witnessed in terms of quantitative easing in Europe and Japan does not seem to be working as well anymore.

“It might be a lot more reliant on fiscal stimulus than on anything else and, when you have so many separate governments in the eurozone, getting combined fiscal stimulus is going to be particularly difficult.”

Now is the time to be more defensive on equity markets, in Park’s view. He says: “We’ve got plenty of political risk coming up: the US election, the German election next year, the Italian referendum and the ongoing Brexit negotiations.”

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