Here are the trades we made to change our market strategy

Moneyfarm offers fully managed investment portfolios that are tailor-made for investors. Our team monitors the markets daily, periodically making tactical trades to take advantage of opportunities in the market and protect our investors’ capital. In this article, you’ll find a summary of the changes that we’ve made across our range of investment portfolios. If you want to find out which of our investment proposals is fit to your goals and risk appetite, with no obligation, simply complete our quick online process.

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The story of the year so far has been one of strong growth in financial markets, aided by accommodative policy from the central banks. It’s been a positive period for our portfolios too. Despite the perception of some signs of slowing global growth following the massive post-pandemic rebound, we believe the outlook for next year is positive and that corporate earnings still have room to grow. There are, however, some issues for us to keep an eye on and markets have stumbled in recent weeks. One issue is the fact that the direction of monetary policy will gradually change – namely a return to ‘normal’ interest rates – although it must be said that this has been managed well by central banks so far.

The measured return to normality in terms of monetary policy will have an effect on portfolios. There are also problems in global logistics, which could lead to inflationary pressures and hurt certain sectors. Markets have been slightly less smooth of late, but we remain confident in our allocation and the ability of markets to grow over the medium term.

Our Investment Committee has decided to tweak our portfolios to respond to the risks currently affecting markets. Ultimately, though, we retain a consistent level of risk overall so that we can take advantage of market growth going forward. Here’s what we’ve changed.

Lower risk portfolios

For our lower risk portfolios, the key has been the rhetoric coming from the central banks. These portfolios are, after all, more weighted towards bonds, so any normalisation from central banks in terms of interest rates. An increase to long term levels of interest rates, for example, would negatively affect bonds prices, albeit to varying extents.

Since bonds with longer maturity are those affected by rising interest rates, we have reduced our position in government bonds and US Corporate credit. We have primarily replaced them with High Yield corporate bonds, which should benefit from a shorter duration and from the continued economic recovery.

We also switched some of our emerging market bond exposure out of local currency, simply as the increase in yield against the dollar counterpart wasn’t enough to offset the greater currency risk. But this is a reasonably minor change. These changes affect all but our highest-risk portfolio, though the lower risk the portfolio, the more it will consist of bonds.

Higher risk portfolios

For our higher risk portfolios, the chief concern is equities. Ultimately, we have assessed our equity exposure and have decided to largely maintain our current position, save for a couple of small changes. We expect growth in the coming months to be more muted than we’ve seen so far this year. However, with bond yields still low and economic growth likely to be modest, equities still seem the best place to be.

The key change here is that we have closed out our fairly small position in the FTSE 250. This has performed well since we added it to our portfolios, but we are slightly more cautious about the outlook for British mid caps, in light of the recent supply chain issues and the knock-on effects that these may have on the economy. We have redistributed this money with a more global approach.

Another thing we assessed was whether we would close out our ‘value’ position. Our expectations for it to outperform have been lessened since we added it to the portfolio, but the recent narrative from central banks around a return to normal rates has encouraged us to hold on. It’s still a fairly modest position relative to the rest of the equity portfolio and there has, traditionally, been a correlation between bonds yields and the value factor. Specifically, that value equity provides a bit of protection against any rate increases.

We’ve also had to consider our emerging market exposure, which does have a tilt towards Chinese markets. Our exposure to China is small and only applies to our higher risk portfolios, but this was still an important point of discussion for our Investment Committee. On the one hand, reducing our exposure to an area that’s been struggling for some time seems sensible. On the other, some of the world’s highest-performing and fastest-growing businesses have been quashed and could represent a real opportunity.

The outcome here was that, while we think there could be an opportunity there, we are reluctant to add more to an area that’s already seeing plenty of risk. As a result, we decided to maintain our modest position in that area.

All in all, we’ve changed our allocations at the margins, with an eye on what we expect to happen over the coming months. These changes will, in our view, make our portfolio better suited for navigating the normalisation of monetary policy and of the wider economy, a process that we expect to pick up pace in 2022 and onward.

If you have any questions about the rebalancing or Moneyfarm’s investment portfolios, feel free to get in touch with a member of our investment consultancy team

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