Saunderson House [1] investment director Chris Sexton has been increasing the advice firm’s exposure to property within its core model portfolios on the belief the UK economic recovery has taken hold.
It moved into equities “aggressively” in 2012 and has since enjoyed the upside from these weightings. But Sexton is now looking for additional ways to play the recovery.
He says: “This year we reduced our exposure to index-linked gilts and put the money to work in property with the view that interest rates will be lower for longer. We met with some fund managers and were impressed by some of the themes they explained to us, particularly around exposure to property outside London.
“We thought in a continued low interest rate environment it was worth going for property, especially with a pick-up in rental income and growth. So it was a good play for us on the UK recovery.”
Sexton is focusing on commercial property exposure rather than residential. Despite increasingly positive data being released about this recovery and talk of sentiment being too positive, Sexton is still happy to maintain a sizeable exposure to UK equities.
The investment director says: “I am not overly concerned. I cannot see any other hugely more attractive place to go and valuations are still reasonable in the UK.”
Avoiding bubbles
But Sexton has noticed a difference with equities now compared with where they were last year.
He says: “Some of the markets did really well last year so to be buying into them after they had done so well is not our style. I feel more neutral on equities now and it is less clear-cut now that they are a clear buy.
“I am looking at valuations now and little else. When UK equities get expensive we will have a look at them and decide then but that said, we are still delighted the recovery has come to fruition.”
Sexton points to potential bubbles in certain asset classes as a risk he is looking to avoid, particularly residential property prices and certain areas of the US market.
He says: “Asset price bubbles are something we have to keep an eye on. For instance, suddenly these high-tech companies are being driven to really daft valuations. You have to keep an eye on it.”
Elsewhere, Sexton has been monitoring emerging markets and even though he has minimal exposure to them in his balanced portfolios he is confident these markets will become a long-term play.
“With emerging markets and Asia, I think those markets are cheap so I am not looking to reduce the exposure to them that I already have,” explains Sexton.
“There is a value opportunity there and those stories will not be bearish forever. In the longer term, those stories are interesting and as soon as China gets back on track I think there will be opportunities.”
Having sold down holdings in index-linked gilts in order to boost property exposure, Sexton favours a more flexible approach on fixed income.
He says: “The view we have on conventional bonds is they are too expensive.
“Yields are very low considering where we are in the cycle.
“We have allocated to strategic bond funds and absolute bond funds, and we like to go for bond funds with flexibility and control over duration and risk.
“We do not want to have to the bonds ourselves. We want our fixed income exposure to be flexibly managed.”
A mug’s game
The core model portfolios of Saunderson House are focused on equities, bonds and property. Sexton is avoiding exposure to alternative asset classes.
Sexton says: “We have no exposure to alternatives or commodities. We are always quite amused people are interested in gold, but the price could go anywhere.
“In a past life I used to be an oil price analyst and it is, like with analysing the price of gold, a mug’s game. We regard things like that as speculation.”
Sexton and his nine-strong investment team are monitoring and analysing potential market risks, and have identified the impact of changing monetary policy as a key risk.
With the Federal Reserve continuing to taper its quantitative easing programme and the Bank of England also coming under pressure to move interest rates from their record low, Sexton is expecting more volatility.
He is paying particular attention to how changes in long-standing monetary policies could impact long-term investment trends. He says: “We are watching the value in emerging markets.
“We will be spending quite a bit of our time thinking about rising interest rates and what it will do to the economy and corporate profitability.”