Taking advantage of changing valuations and small periods of volatility

This year there have been opportunities to make shorter-term tactical active/passive allocations, taking advantage of changing valuations and small periods of volatility.

Jordan Sriharan, Head of Collective Research at Thomas Miller Investment, says he has tilted his UK and US equity allocations more towards passive funds this year. The UK equity market started to sell off towards the end of January and remained volatile until the end of March – the FTSE 100 fell to 6,888 on 26 March, its lowest point since 6 December 2016. Between the start of the year and this point the active UK equity funds included in Thomas Miller Investment’s model portfolios had outperformed the index, but Mr Sriharan thought this might reverse.

"The sell-off in UK equities was driven by the large FTSE 100 companies performing very poorly and dragging down the performance of the overall index," he explains. "Given the magnitude of the declines, the valuations of these companies neared cyclical lows. We were mindful that the active managers, of the funds in our model portfolios, had a lower weighting to these index heavyweights than the benchmark. So in order to gain exposure to companies that sold off the most we switched some of the allocation to our strongest performing managers into a passive fund."

This included switching some of the allocation to the Artemis Income (GB00B2PLJJ36) and Evenlode Income (GB00BD0B7D55) funds to Legal & General UK 100 Index Trust (GB00BG0QPG09). But Mr Sriharan and his team reallocated this portion back to Artemis Income and Evenlode Income in the middle of May, by which point the FTSE 100 had risen 12 per cent, in contrast to the funds' returns of 7.9 per cent and 8.8 per cent, respectively.

"The time horizon of this investment was shorter than what is usual for us," says Mr Sriharan. "Our longer-term view remains that active managers are more likely to outperform given where we are [late] in the economic cycle. However, as the cycle lengthens and volatility picks up, this provides the opportunity to profit from short-term changes in sentiment."

Thomas Miller Investment had invested passively in the US for six years, but has recently started selling down its passive exposure to the S&P 500 index in favour of active funds. It has added JPMorgan US Equity Income Fund (GB00B3FJQ599) because it is focused on large caps and invests via a value approach.

"This change follows our broader strategy of favouring active rather than passive investments at this stage of the economic and business cycle," explains Mr Sriharan. "We believe it is prudent to rotate away from areas of the market that have performed exceptionally well where valuations look expensive, and invest in areas that have underperformed and where valuations look more compelling."

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Head of Collectives Research and Senior Portfolio Manager

 

Article first appeared in:

Investors Chronicle (14th June 2018)

 

The opinions stated are those of the author and should not be taken as investment advice.  Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance.

Clients are advised that the value of all investments can go up as well as down. Any past performance or yields quoted should not be considered reliable indicators of future returns. Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.

Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. Thomas Miller Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155). It is a company registered in England, number 08284862. Thomas Miller Investment Ltd is authorised and regulated by the Financial Conduct Authority (Financial Services Register number 189829). It is a company registered in England, number 2187502. The registered office for both companies is 90 Fenchurch Street, London EC3M 4ST. Thomas Miller Investment (Isle of Man) Limited is licensed by the Isle of Man Financial Services Authority. It is a company registered in the Isle of Man, number 48181C. The registered office is Level 2, Samuel Harris House 5-11 St Georges Street, Douglas, Isle of Man, IM1 1AJ. Thomas Miller Investment is a registered business name of Thomas Miller Investment (Isle of Man) Limited. Telephone calls may be recorded.