By FERGUS SHAW
Within multi asset portfolios, we hold equity positions with diverse exposure to the Value factor.
This is to add diversity alongside long term growth allocations. To date these have comprised a global value style tracker, a US small cap value tracker and a European smaller company tracker. We continue to hold a meaningful exposure to Japan which is construed by some allocators as offering value. Finally, we hold a long-dated call option in the European banks sub-index.
We term this group of holdings “Value Recovery”. However, they represent a far more diverse set of opportunities with a range of drivers than a simple allocation to a single style. Further, by implementing with passive vehicles, we retain full flexibility in terms of position sizing and timing.
When adopting a global approach, industry and sector drivers have tended to take precedence over country analysis. Europe’s financial system has been under intense pressure since the financial crisis resulting in European Banks trading very cheaply and this sector will tend to enjoy relief rallies when the outlook for the economy is shown to be less bad than expected. Notwithstanding, country factors can still provide pressure point opportunities.
Japan has long been identifiable as a market offering relative valuation attraction when combined with the catalyst of positive corporate governance evolution. Closer to home, the UK equity market has been a global underperformer for an extended period and soundly ignored since the Brexit vote in 2016. This has certainly created a pressure point which might well be combined with optimism given the process of Brexit is now underway and businesses can act with greater clarity, meanwhile the UK’s apparent leadership in delivering a vaccine program bodes well for recovery in the domestic economy. While concentrated in a small number of industries at the top, the UK equity market offers significant breadth further down the market capitalisation hierarchy combined with greater exposure to the domestic economy.
We have added to these a UK exposure via a holding in the Vanguard FTSE 250 ETF. The choice of a tracker vehicle rather than active manager allocation indicates our flexibility within the multi asset portfolios which own direct securities, specialist active managers, index exposures and investment trusts.
This provides exposure to the mid cap universe in the UK which carries greater domestic exposure than the index of largest companies and is more diverse. This allocation will benefit from improvement in the domestic economy which will be aided by a likely successful vaccination program and ironing out of the challenges presented by the new relationship with Europe. We have previously used this index to build exposure to the UK equity market. The mid cap index benefits from the tendency of overvalued companies to be promoted to the FTSE 100 and the fact that it contains many successful, niche businesses. The group of companies within trade at an historic price to earnings (PE) ratio of 15.6x and historic dividend yield of 2.1%.