I always find the summer a good time for reflection. During the warmer months the pressures of work invariably subside, news flows ease off and the mind is free to wander.
This year, though, my thoughts have not drifted as far as I would like. I have been unable to shake the feeling that all is not as rosy as the investment markets suggest. Specifically, all is not well with my pension portfolio.
That’s not to say that things are bad – in fact my investments are in rude health. However, the temptation to dump it all and retreat to cash is as strong as it has ever been. Is this just the ghost of the credit crisis haunting my investment decisions and influencing my risk appetite, or is it grounded in reason and logic?
The backdrop is indeed scary. Expectations of inflation are not going away and the Fed’s indifference will not last long; another rate rise would appear to be imminent. Growth rates around the world are nowhere near long-term averages and I have a hard time believing that any of them are really robust. On top of this we are eight long years into the liquidity-fuelled business cycle. The Doomsday Clock is at two and half minutes to midnight and ticking.
OK, OK… I’m clearly choosing to dwell on the negatives, but I could certainly do with taking some risk off the table. This is where you come in. I’m going to be cheeky and ask for some help. All points of view are welcome.
Before I go through my holdings, though, I should point out that my pension is likely to contain some mutual funds you are not aware of. This is because I’m based in the UK and cannot access US 40 Act funds. But at the same time, this does allow me to shop in the highly diversified Ucits market.
I am also aware that my pension is extremely aggressive, with less than 9% in fixed income and 3% of that in emerging market debt. But at 35 my investment horizon is sufficiently long that I hope to be able to exit the racier markets when the time is right. That horizon has influenced much of my investment decision-making and I’ve built the portfolio with an eye on the future.
To that end, Asia is my single largest holding, at over a fifth (21.4%) – all of it with Edinburgh-based Stewart Investors. This is the longest-standing holding in my pension and probably the easiest to explain. For an emerging market manager, the firm is extremely risk-averse. That has enabled it to top virtually every emerging market category over the long term. When markets rally, as they are doing now, Stewart will almost certainly underperform, but during the inevitable correction it pulls away from the crowd.
The 16.2% position in continental European equities is a relatively new one, started shortly after Donald Trump’s election win in November. For me, BlackRock is one of the three European equity powerhouses, along with Invesco and the Henderson part of Janus Henderson. They all have strength in depth. Even though Alice Gaskell – the London-based manager of my pick – has slightly underperformed, returning 36% in sterling terms since my first purchase, I’m still happy with this decision long term.
One name I’m sure you’ll be familiar with is the MFS global equity team, led by David Mannheim. The MSCI World is without doubt one of the hardest indices to consistently outperform – only the S&P 500 is beaten by a smaller percentage of managers – but these guys mostly manage it.
On an absolute basis, my worst performing holding since purchase has been the small cap fund from Aberdeen Asset Management – another part of my post-Trump plan to make my pension great again. Managed by Citywire A-rated Ralph Bassett, the fund is accessible in the US via the Aberdeen US Small Cap Equity fund, but the benefits its value style, which worked in its favor in 2016, haven’t carried over into this year. Over three years the 40 Act version tops the 243 funds in its Citywire category, but over one it drops to 250 out of 269.
In global emerging markets, I have long trusted Matt Linsey and his GAM fund. However, on doing this review I discovered that the veteran manager is about to stop running the fund. By the time you read this, I will have purchased Fidelity Emerging Markets run by Nick Price – a good substitute with an excellent track record of outperformance. Oddly, despite Price’s prowess, he is not accessible through the Fidelity you know – perhaps because it is a saturated space in the 40 Act market with plenty of excellent managers already on offer.
The last two significant holdings come from London-based boutique Troy Asset Management: one in UK equities, the other in mixed assets. Both teams of managers have made their names at the defensive end of the spectrum and have served me well. So I know why I picked each manager, and for the most part I've been pleased with them. The run has been good too, coming on the back of multiple years of prosperity. What is there to worry about then?
Well, I’m sure many of you will have looked at my allocations and balked: just eight funds, 91% in equities and over a third in emerging markets. Are these the investment decisions of a mad man?
I'm concerned by the one and five year returns of the markets that my picks operate in too. I see dangers everywhere. I know I’m exposed, but I can’t convince myself to invest more in fixed income.
I think high yield has gone too far and sovereigns carry too much risk. Perhaps I should just take away the currency risk entirely and only invest in sterling-denominated assets?
I’m open to suggestions. Let me know what you would do!