Liontrust MA Quarter In Review Q3-2022 15.11.22 (Spreads) - Flipbook - Page 8
• We have been moving closer to our SAA (which is effectively our
default asset allocation with no tactical calls) by lowering the equity
overweight to reflect our more cautious positioning. We have cut
risk further by lowering our exposure to equity beta-like assets such
as convertibles, moving that money into our alternatives allocation
(and upping that to overweight the SAA) via a position in the Liontrust
Diversified Real Assets Fund (DRAF). We believe real assets should
provide a differentiated return and income profile and, importantly
given the backdrop, an element of inflation hedging.
• We have also increased cash weightings from around 2% to
3-4%, offering both more protection against volatility and some dry
powder to invest at opportunistic moments.
• As a result of the rebalance, we have also been altering the blend
of active and passive funds across the portfolios over the last
quarter, focusing on areas where we feel we could add the most
value through selecting active managers. For UK and European
equities, for example, we are moving to an overall 70%/30% split
between active and passive funds, compared to 40% active/60%
passive in the US.
• Counterintuitively, overall passive exposure across the portfolios has
increased (by an average of 1.9% for the Growth portfolios) as a
result, but this means we are applying a consistent approach to
active/passive splits across our full Multi-Asset range. We continue
to believe that, post-corrections, markets should move beyond
indiscriminate selling and focus more on what the earnings cycle
is actually telling us and this is an environment where our favoured
active managers can prove their worth in assessing how inflation
is affecting companies and which are best placed to thrive. The
change in the active/passive exposures means we are getting
maximum benefit from areas where active managers can add
maximum value.
• While the passive exposures have modestly increased, we also
remain selective in our active managers and, again, have taken
this rebalance as an opportunity to make changes.
• In the Income portfolios, we replaced Redwheel Enhanced
Income with JOHCM UK Dynamic. While the deep-value RWC
fund has performed well in the recent rotation, this comes after
several years of weaker returns. We have concluded that the team’s
concentrated strategy, investing in deeply discounted companies
and not necessarily needing to see a catalyst for potential re-rating,
carries too much risk of either mistakes or falling into value traps
in declining industries, especially with the speed of disruption,
innovation and transition we see now.
8 - Liontrust Multi-Asset Funds and Portfolios Quarterly Report: Q3 2022
• In contrast, JOHCM UK Dynamic is more diversified, with strict
sector limits around portfolio construction, investing in around 50
companies versus RWC’s 25 to 30. While the sector framework
and identification of a catalyst for change result in a ‘value-lite’ style,
this mindset leads to a more diversified portfolio, which is arguably
more open to opportunities in recovering and/or undervalued
companies. Performance has been more consistent, although it
should be noted there is a difference in yield, with RWC more
income focused and using a covered call strategy to enhance this
whereas JOHCM UK Dynamic has a total return objective. At the
time of writing, the three-year average 12-month yield on JOHCM
UK Dynamic is 3.8% versus 5.6% on RWC Enhanced Income.
• We believe higher yields can often be prevalent in mature industries
finding it difficult to grow and ultimately favour value managers
looking for mispriced quality through catalysts as opposed to those
focusing on getting in at the bottom.
• In the Growth portfolios, we have replaced Man GLG Continental
Europe with BlackRock European Dynamic and AXA Framlington
US Growth with AB American Growth.
• These two European funds are similar so this move is more a case of
rationalisation, bringing our Multi-Asset Portfolios and Funds closer
together, as opposed to concerns with the strategy. In essence, both
pursue a high-quality approach but BlackRock European Dynamic
is backed by a larger team and has a more flexible strategy, with
a high-quality backbone but the capacity to rotate into value when
the opportunity exists.
• Our move to the AB American Growth Fund is another example
of rationalisation as the AXA Framlington fund has performed well.
Again, both look to uncover persistent growth opportunities but
AB American Growth tends to be a little more concentrated and
adopts a purer growth style, which we believe is viable given the
US market composition – although it should be blended with a
more core or value-biased proposition.
• Overall, given the market volatility being seen this year, we see little
point in trading aggressively. we build our portfolios as preparation
rather than reaction and we are confident the changes we are
making will help us to deliver on suitability and contribute towards
meeting long-term outcomes for our clients.
