The Monthly - July 2018

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23/08/2018
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Since the last monthly update there has been a significant change of guidance at an asset allocation level. Through July, the decision has been to reduce the level of investment in UK equity, with subsequent increases in other asset classes. This has predominantly been focused on overseas equity. 

The Asset Allocation Committee has outlined a number of reasons for this change of approach, which has seen a further reduction of our previously underweight allocation:

  1. Q2 was very positive for UK equity and as a consequence, client portfolios performed strongly. Reducing the allocation to UK equity at these levels (FTSE 100 around 7,700) locks in some of those gains.
  2. The outlook for UK equity, at least from a Rowan Dartington perspective, is negative as expressed by our underweight positioning. This is based on the economy struggling under the weight of consumer indebtedness in the context of low levels of wage growth, inflation remaining above the BoE target and, looking forward to the end of Q2 2019, a looming gulf of uncertainty around everyone’s (least) favourite topic: Brexit.

 
From an implementation perspective, the process of reducing UK equity within portfolios is a complex series of decisions based upon:

  • Individual position sizes
  • Positions relative to model guidance
  • Capital Gains Tax (CGT) constraints
  • Market timing to try and eke out additional gains.

 
Prior to the change of guidance, this figure was below 10%. Due to the nature of the bespoke mandates that we manage, we will always have clients that deviate from the targeted allocations to a greater or lesser extent, primarily due to a) new portfolios undergoing a restructuring, or b) CGT constraints which prevent further sales in UK equity. Client portfolios have been impacted across the board since the change at asset allocation level has seen changes across all risk profiles and objectives. Quantifying the scale of the change is somewhat abstract, but essentially the lower UK Equity allocation resulted in some 82% of clients being in excess of 5% overweight their target weighting in the asset class. This is an aspect of client portfolios which is monitored and discussed on a weekly basis, and forms an important part of our approach to managing portfolios.
 
Recent sales have addressed this to an extent, with the graph below providing an insight into how this figure has declined over recent days:

 

the monthly graph

 

ISA subs are being made (where relevant and where we have authority) with the proceeds of UK equity sales given that there is likely to be excess liquidity in the majority of client portfolios during this period of heightened transactional activity. Another consequence of this action is that some of the investment of new client money has been somewhat delayed as the changes at asset allocation level were formalised and embedded. Again, this is something that we would consider likely to be a short term issue and which is now being addressed.
 
Finally, we made reference to positive performance in Q2 earlier in this piece and indeed last month. The data is in the process of being audited and approved but on a preliminary basis, implies outperformance across all mandates when compared to the appropriate ARC benchmark indices. Once this has been ratified it will be available for a wider audience, and I hope to share it with you next month. In the meantime, please direct any questions to your point of contact here at Rowan Dartington and we look forward to providing another update in early September.