Risk assessment
Sexton believes the US market looks particularly expensive. While markets continue to see Trump’s influence as constructive, he is an unknown quantity.
“Everyone is emphasising the positive aspects but there could be negative implications for trade and international relations. There is always the risk that he does something silly,” he says.
There are risks elsewhere as well, from the Italian banks to the European elections. Then there are the risks to the euro project as a whole. Sexton says: “Article 50 may be triggered in March and there is the risk of an immediate fallout from the negotiations.
“At the same time, China has its next leadership reshuffle coming up later in the year.” All this has left Sexton more nervous on risk.
Within his equity allocation, his key overweight positions are in emerging markets and Europe, while he remains neutral on the UK and Japan, and underweight North America. “This comes back to our approach,” he says. “We always tend to go for the value.”
Then there is the bond problem. There may be even greater risks in the bond market and Sexton believes yields could rise further than many people believe. As a result, the group’s government bond weighting is almost entirely index-linked.
“We are not saying they’re cheap but they act as a bulwark, adding some solidity to the portfolio. They should do well if inflation takes off and they are not as vulnerable to capital loss,” he says.
His marked preference is for short-dated corporate bonds. “We expect bond yields to carry on edging higher and that there will be further losses on long-dated bonds. We are also concerned that an orderly march could become a bit of a rout.”
Of course, this may spook other areas of the market. In this respect, Sexton says the short-dated bond and cash positions are more of a “holding pattern”, waiting for the markets to present better opportunities.
“We have had nine consecutive record highs for the FTSE 100. Even with the backdrop of sterling weakness, that does not seem right. It seems to us that investors tend to get very excited at the wrong time and very depressed at the wrong time,” he said.
Staying active
Just as Saunderson House confines itself to a limited range of asset classes to keep things simple, the group also tends to stick with a core group of underlying managers.
Sexton says: “We value our relationship with fund managers. We need to understand how they work and how they will add value in different parts of the cycle. Our philosophy is to have active asset allocation, with active fund selection and to back active management.
“We limit ourselves to four asset classes very deliberately. We aim to avoid the trap of saying ‘this is my odds and ends bucket’ where people stick a bit of absolute return or whatever. We are very specific about what is in a portfolio and why. We are quantitative in our assessment of whether an allocation is adding value.”
Sexton explains why the group chooses to focus on value: “If the world is not a disaster area, investors should buy the cheap stuff until it becomes less cheap. This means going against the tide, adding to emerging markets when everyone hates it, buying cheap and being prepared to wait.
“With some of our recent positions, such as our emerging market holdings, we had to wait 18 months, but we had the relationship with our clients to allow us to wait it out.”
The group keeps its client models simple. Sexton is sceptical on risk ratings, though they still measure volatility. Portfolios are divided into cautious, balanced and adventurous, which leaves a different weighting to risk and defensive assets. They deliberately avoid areas where analysing risk is imprecise, such as hedge funds or commodities.
Sexton says they also aim to be exact as clients like to see they are making calls, “rather than just obfuscating”. The aim is to be accountable for performance as well, as clients tell them when they are happy or not.
“Knowing our clients well keeps us at it. For us, the value element is the bit that adds real value. It feels uncomfortable all the time – it’s not easy to have a low weighting to the US at the moment – but it tends to work.”
Saunderson’s top five themes
Fiscal expansion
There is likely to be degree of fiscal expansion but this will be more modest than expected. Despite Trump’s rhetoric, there may not be much scope for growth. The Republican Party is traditionally the home of fiscal conservatism and it will not back a huge rise in spending and debt.
Bond slide
The trend of rising bond prices (falling bond yields) may well be over. Investors will need to be wary of the impact of any growth and inflation on bond prices, most importantly those of longer duration, which by nature are more sensitive to rising interest rates. The group has been wary of highly valued bonds and has little exposure.
Advantage equity
Equities with reliable earnings and dividends, such as utilities, beverage and tobacco, have performed well. Their bond-like attributes have become more valuable in a world of rising bond prices. If bond yields continue to rise (prices fall), these stocks may give back some of their recent strong performance. The group is positioned to take advantage of any continued rotation towards stocks with more cyclical earnings.
Property both ways
Commercial property could be subject to a two-way pull. It should benefit from any growth but may suffer as yields look less attractive compared with bonds. However, it already offers a generous yield premium over government bonds and is less vulnerable.
Marginal gains
The appeal of cash deposits may increase on the back of higher interest rates. The group does not expect rates to rise far, so this is only a marginal improvement. Having reduced risk, the group’s portfolios have a relatively high allocation to defensive assets such as cash and short-dated bonds.
