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S&W model portfolio takes defensive stance – including reduced UK exposure

5 July 2017

Smith & Williamson has reduced its model portfolio exposure to UK equities and increased the duration of its bond allocation in its latest rebalance following a period of strong equity performance.

James Burns, co-manager of Smith & Williamson’s Managed Portfolio Service said the investment team had lengthened the maturity profile of the bond allocation, by reducing short-dated funds, on the basis that longer duration bonds may provide better protection against a potential downturn in equity markets.

Tactical moves in this respect have included selling the Invesco Perpetual Tactical Bond fund and adding to products with a more benchmark duration profile such as the Liontrust Monthly Income Bond fund.

Overall exposure to the UK market has been reduced by cutting down its positions in the iShares FTSE 100 and MAN GLG Undervalued Assets and increased more defensive positions such as the Invesco Perpetual UK Strategic Income fund.

“With market valuations riding high and many looking relatively expensive, the team is now taking a slightly more defensive stance,” said Burns. “These decisions were partly influenced by continuing uncertainty over the UK’s Brexit negotiations and the election result which produced a hung Parliament in June.”

In addition, Smith & Williamson has increased exposure to European equities following the election of French President Emmanuel Macron and his successful performance in the French Parliamentary elections earlier this month.

This has included switching to the Blackrock European Dynamic fund from Argonaut European Alpha. Overall exposure to the euro currency was maintained by accessing the hedged share class of the BlackRock fund.

The latest re-balancing also involved removal of Yen hedging, switching from JP Morgan Japan’s hedged unit to its unhedged unit.

The Central Bank of Japan has said it will attempt to reduce the value of the Yen, but the Yen typically strengthens when global financial markets face downward pressure. With fears of a market downturn, Burns notes that the Yen may still be an effective hedge if the market does drop.

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