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Understanding the latest Moneyfarm rebalancing

Headed up by our Chief Investment Officer, Richard Flax, our asset allocation team monitor the markets on your behalf, analysing market movements against the long-term goals of your portfolio, helping you stay one step ahead.

You’ve probably noticed a recent pick-up in market volatility, sparked by increasing economic uncertainty and geopolitical risk.

As we navigate potential trade friction, Brexit, increasing Eurozone tensions, and tighter monetary policy, threats to the global economy have been reflected in a recent downgrade to IMF growth expectations.

The global backdrop is complex. We monitor the markets daily on your behalf to ensure your portfolios reflect your investor profile and are positioned in the best way to help you reach your goals.

It can be tempting to want to change your risk level in response to market volatility, but your investor profile and risk appetite is based on you, not the external environment. By building your portfolio to reflect your appetite for risk, you can help mitigate external risks better than having a reactionary investment strategy.

It’s important to remember after periods of such low volatility, that this dynamic is a normal part of the financial markets and can be managed in line with your investor profile.

We’ve pulled together this handy guide of the most common questions investors ask during market volatility, answered by our Head of UK Investment Consultants, Will Hedden.

Equity markets

Whilst uncertainty in this climate has been around for some time, markets are starting to acknowledge it in their valuations. The belief that Central Banks will be on call in difficult situations with stimulative measures is being weakened by hawkish rhetoric from policy-setters.

US equity markets burst into 2018, underpinned by strong earnings growth, protectionist trade policies and tax reform.

Recent volatility has unwound some of this growth and as we move into the final months of the year, this momentum could begin to slow. Equity markets have been expensive for some time, but these lofty earnings-based valuations have been supported by strong corporate profitability.

US Share BuyBacks and tax cuts played a big role in supporting valuations this year, but they not be as influential in the future.

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By making an investment, your capital is at risk.

Despite the potential for challenges that lie ahead of US Equity, we have a positive outlook on the market. Earnings growth is expected to outstrip momentum in Europe, especially as political tensions increase in the region ahead of election season.

Trade concerns, the tightening of monetary policy in developed markets and the dollar’s appreciation also heightens risk in Emerging Markets.

In higher risk portfolios we reduced our exposure to Asia and Pacific Developed Equities, and have reduced our overweight European Equity position, favouring US equity instead.

What has changed in Moneyfarm portfolios

Whilst the clouds have started to form on our outlook, the Investment Committee was still happy with the more conservative positioning of the Moneyfarm model portfolios.

After careful consideration, we decided to use this rebalance to control the volatility of the portfolios in line with historic levels. We’ve managed portfolio volatility through our overall equity exposure, which we reduced.

We’ve also increased exposure to Sterling Cash, to boost liquidity and generate a small yield without adding risk.

In terms of foreign currency exposure, we have increased the sterling exposure, mainly by selling US Dollar, and Emerging Market currencies in some higher risk portfolios.

Moneyfarm portfolios have benefited recently, on balance, from an exposure to non-sterling currencies. Whilst we want to maintain USD’s hedging properties, we also want to control our levels of volatility and limit any downside in the event of a Brexit scenario that favours sterling.

These rebalancing adjustments have shifted exposure slightly away from equity, in line with the risk profiles of our investors, and increased the portfolios’ sterling exposure.

If you’d like to discuss the performance of the model portfolios or want to know the thinking behind the Moneyfarm investment strategy, please call your Investment Consultant on 0800 4334574.

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