As the new tax year gets underway in the UK, so too does the gradual easing of the lockdown restrictions that have been in place since December of last year. Global vaccination rates are accelerating, albeit unevenly, allowing leaders to look to a future in which Covid-19 is no longer the key consideration.
Uncertainty may remain high but there is growing optimism that 2021 will indeed be the year of measured recovery that many expected it to be when mapping the future of the pandemic last year. This is particularly the case in the sectors most affected by lockdown measures, as vaccination campaigns allow economies to gradually reopen.
It’s for these reasons that we’re rebalancing our portfolios to position them for the opportunities that may arise globally over the medium and long term. The changes made differ depending on the level of risk in your portfolio – we’ve detailed the key ones below.
Low risk portfolios
It’s been a tricky start to the year for low risk portfolios. Expectations of future growth, driven by vaccine rollouts and expansionary policy making – along with the talk of returning inflation – has had a negative drag on bond prices.
With this in mind, we look to the UK with some optimism – the relative speed of the vaccine rollout puts the country in a good position to make a strong recovery. Despite this, yields on UK corporate bonds are attractive when compared to their US and EU counterparts. For that reason, we’ve decided to move more money into this asset class – funded by the selling of the money market ‘Sterling cash’ ETF, which offered some protection as bond prices suffered but is now of limited use due to its very low yields.
We’re confident that these UK corporates are good value for their yield, given the expected pick up in economic activity. With this in mind, we also decided to diversify our exposure to ‘inflation linked’ bonds. Previously, we held only UK inflation linked bonds, but these added a fair amount of risk to the portfolios. Their global counterparts have a much lower ‘duration’ (susceptibility to prices changes based on a change in yield), while still offering the all-important inflation protection.
So, between these two trades, we managed to maintain a similar level of risk in the portfolios, while shifting the focus from ‘interest rate risk’ to ‘credit risk’. We think the latter will perform better in the positive environment we believe lies ahead.
Medium risk portfolios
Just as with our lowest risk portfolios, we are cutting our exposure to UK inflation linked bonds in our low to medium risk portfolios, along with the ‘sterling cash’ money market instrument. This is to gain more credit risk exposure to increase the yield profile of the portfolio.
However, with these portfolios, not only have we shifted into more global inflation linked bonds and some UK corporate exposure, we’ve also introduced a Chinese government bond ETF. It offers great diversification benefits as they are remarkably uncorrelated with other asset classes. The yield is relatively high, too, despite the credit risk being lower than that of its EM counterparts. Having said this, we acknowledge some of the risks in an investment like this and have kept it to a fairly small position.
In our level 4 portfolio, we also added a small amount more equity to help generate additional returns.
Higher risk portfolios
As for our portfolios that are towards the riskier end, we are quite happy with our positioning already. Our shift towards value equities in November has, so far, been successful. In this rebalance, we are looking to marginally increase our equity allocation in these portfolios, but in a targeted way.
Our position in UK equity has, historically, been low. However, given the relative speed and apparent success of the vaccine rollout in the UK and the slow reemergence out of lockdown, we see this as a time of opportunity for UK businesses, which may have previously struggled. For that reason, we’ve decided to introduce a FTSE 250 ETF into the portfolios. This is an ETF with a focus on medium-sized UK businesses, which are traditionally more closely linked to the performance of the UK economy than their large cap counterparts (FTSE 100).
We have also decided to marginally increase our exposure to emerging markets, given the prospects for a robust global recovery, we will look to benefit from the slightly lower valuations that these equities have versus their developed market counterparts.
It’s important to highlight that, across all of the portfolios, there is no complete overhaul of the positioning. We have, rather, made tweaks that we believe better positions us to take advantage of any opportunities that arise across the medium and long term.
If you have any questions about any of the trades or our thoughts, please book a call with our Investment Consultant team.