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Preparing for all eventualities beats trying to predict the market

By March 9, 2021IN THE PRESS

‘Blackwood’s model portfolios were launched in 2018 as bespoke models for our IFA partner, Elevation Wealth Management. They operate as risk-rated model portfolios, based on the dynamic planner risk profiles 3 to 7. We approach portfolio construction from the top down. We have a clearly defined strategic asset allocation and determine the tactical tilts that apply (subject to a cap of +/-10%).

We are happy to buy active funds for our clients if we are confident that they will add value. Over the past few years, however, our analysis suggested that lower-cost passive funds were mostly likely to add value and have concentrated portfolios here.

Pictured above left, Tony Smith, director, middle, Susie Maister-Gray, director, right, Scott Garretley, investment manager

This position is moderating: one of the consequences of the pandemic is the divergence of those companies and sectors we expect to do well and those that we expect to struggle. This has been evident in the technology stocks that have driven stock markets (particularly in the US) over the last year. We redirected the portfolios towards this theme throughout 2020 and we have built a number of thematic exposures within the models such as digitalisation, healthcare innovation, and green and clean energy infrastructure. The strong returns from these thematic tilts have justified their inclusion and we believe that this has more to run.

With the end of lockdown approaching, we have witnessed a noticeable shift in investor sentiment. Stretching valuations were evident for many of the technology companies that had been pulling stock markets forward. As a result, there has been a growing rotation out of the technology stocks to those that have suffered the most from the lockdowns, as investors imagine their trading recovery.

Even if it will take many years to reclaim the GDP levels prior to lockdown, investors are rightly focusing on the strong recovery and economic growth that will come from the easing. As such, we expect this market rotation trend to persist in the coming months and have been positioning the models accordingly.

Exposure to digital companies is being reduced and we are looking at ways to increase our exposure to commodities. Commodity prices have been rising, fuelled by oil pushing through $60/barrel and rising demand driven by the Chinese economic recovery.

Within the model portfolio structure, we are often limited by platforms to investing in open-ended investment company (Oeic) or unit trust structures. Frequently we will find one or more platforms do not have access to a particular fund. Many platforms prohibit or make difficult investing in exchange-traded funds that increasingly dominate fund investing due to their cost advantage.

To provide a greater service to our investors and to ensure we have access to the very best investments we are preparing to launch our own Oeics within the models. This will grant us the ability to build portfolios of directly held stocks and to select funds that most precisely match the exposure we want for clients.

Finally, across all our model portfolios we have a focus on resilience. We spend far less time trying to predict markets than we do on trying to be resilient whatever the outcome. We do this through the diversification across asset classes, ample cash buffers, high-quality or high-liquidity sovereign debt assets and the holding of hedging assets, such as gold.

These helped cushion the impact of stock market falls in March last year and we are pleased with the recovery and performance of all our models.’

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