In the 11 years that Ben Gutteridge has worked at Brewin Dolphin, the UK-headquartered discretionary wealth manager with a Jersey office, has nearly doubled its assets under management, from £17bn to around £30bn.
The proportion of the money managed in collective investments has soared over this period, from £1bn to £15bn, and as head of fund research, Gutteridge now oversees a team of seven fund analysts.
“It’s not just the market taking us to that position, there has been a clear sea change in the way we manage portfolios and therefore, the importance of using collectives.
"While my primary function is trying to find good investments within the fund collective universe, I also have a supporting role sitting on an asset allocation committee and helping to formulate group strategy.”
Timing is everything
The format for Brewin Dolphin’s asset allocation meeting starts with performance attribution to see where value has been added, and where it has not.
“Is it time to take profits, or is it time to cut losses? Is it time to narrow underweights? The continual erosion of alpha through an underweight to government bonds, for example, isn’t something we can ignore because it’s hitting us with a performance attribution month after month, and so we have to keep revisiting the case.”
The three key drivers which they focus on are central bank inflation and interest rate policy, such fundamentals as whether the economy is gathering or losing momentum, and the valuation of the asset classes.
“It’s a combination of factors. We also discuss political risk as well, the news flow, particularly in Europe.
"That’s going to affect our decision making there, and has been a big determining factor in our reluctance to go meaningfully overweight in European equities. At the end we look at technicals as well.”
Beyond assessing the major asset classes in terms of equities, there is a bond equity decision, and within bonds there is a further credit sovereign decision.
Cash and property weightings, the latter split between UK and commercial property, are duly considered too, as well as what Gutteridge calls “an alternatives bucket”.
“Our benchmark composition means it’s primarily composed of hedge fund type products so that’s what we’re dealing with when we’re making an asset allocation decision".
The overarching approach is more strategic than tactical, he says, pointing out that “there is constant debate about the need to tactically do this and that but the vast majority of the time we’re making a 12 to 18 month decision”.
Big in Japan
One recent decision made at the beginning of November was to add exposure to Japan; he explains how this came about.
“A lot of these things are horsetrading, what do you want, what don’t you like? On performance attribution, we were not being rewarded from our overweight UK equity position.
"We were not particularly bullish, we are positive on the dollar and we feel quite cautious about what that means for commodity and oil prices.”
“There’s value in the UK equity position, a lot of dividend, which is just what our clients are after, but if we think about the composition of the UK equity index, there are a lot of commodity-related names in there.
Whether it’s integrated oil companies, diversified miners, or oil service companies, we thought it prudent that we take a bit of money out of UK equities.
That resulted in what he describes as an “unenviable choice” of where to allocate money: “You feel like bonds and cash are not really giving you anything.
We’re already overweight in equities, but I still think there was a near-unanimous vote around the table to allocate that money to Japan.”
The call was made after the Bank of Japan’s decision to both increase and extend its quantitative easing programme which he says surprised markets in terms of its timing (sooner than expected) and on a much greater scale than Brewin Dolphin had expected.
“We felt like it was a clear message from the Bank of Japan that they would, in the face of any future disappointment, do the same again.
Yes, this is an experiment, but it’s one they are whole-heartedly committed to and that is news for us.”
Gutteridge says the overweight position in Japan is for the next 12 to 18 months in line with other strategicdecisions, and that the Bank of Japan’s stance relative to other central banks, is going to be the most expansionary.
In order to get the performance in local currency terms, Brewin Dolphin is opting for a hedged share class for its Japanese fund exposure, rather than having to worry about having to maintain an ongoing hedge position itself.
The obvious downside is if the currency appreciates, which is often associated with stock market weakness, the portfolio would not benefit from the gain, and there is also an added cost for the comfort of having the hedging.
“We recognise that it increases your volatility as an investment because if stock markets go up, then typically the yen’s going to go down so therefore you gain on equities but lose on the yen and don’t gain as much.
Whereas if equity markets go down, you lose on the equities but you gain on the yen.”
The yen is structurally in decline, hence the wish to hedge the currency so as not to endure currency weakness as the stock market appreciates, he says, in contrast to its unhedged weighting in the US.
As for the outlook in 2015, Brewin Dolphin retains a positive outlook on equities above all other asset classes.
“We’re in the fifth, approaching sixth, year of a bull market, but we don’t feel we’re late cycle. It’s not an energised recovery by any stretch, it’s a long, drawn out recovery and that means gradual take-up and growth but no inflationary pressures.”
He adds: “We don’t think valuations kill bull markets, it’s recessions that kill bull markets. We’re dipping in and out in Europe but in the US we feel there’s no imminent recession and therefore the fundamentals remain sound.”
The big question, says Gutteridge, is to what extent the rest of the world is going to plague the US progress.
The good news from his perspective is that much of the painful adjustment in the rest of the world has been done.
Significantly, the “export of deflation to the US means it’ll be akin to the back half of the ‘90s, where that lack of inflation in the US allowed the US growth story to continue to run, so we feel that is the most likely outcome.
“We don’t expect a blood bath in bonds. You are not going to make much money, but they remain a decent portfolio hedge, and so for risk management purposes, worthy of inclusion.”