The main change is that a shift from US equity to UK equity is advised, for the following reasons:
Pros for UK Equity
-Expected to outperform US returns
-Assets are unusually cheap at present
-High dividend yields in current climate
Cons for US Equity
-Equity forecasts are lower than for the UK
-Valuations are higher than they should be
-US dollar is expensive for now
A shift to a higher exposure to UK equities may seem alarming to some, however the UK economy is actually in good shape, with resilience from global trading and strong financial services. To account for the increase in exposure to UK Equity, we suggest that a new fund is added to maintain an effective level of diversification.
In the Fixed Interest sector, it is recommended that the weighting in index-linked bonds is reduced and that short dated corporate bonds are introduced. These offer better long term returns for a reduced level of risk.
Finally, an increase to your exposure to Emerging Markets and Japanese equities is advised as the former are experiencing high yields from debt vehicles and the latter seem to be reasonably priced relative to history.
The following charts will help to illustrate the full effect of the changes in relation to asset class:
As you can see, the proportion of investments held in UK Equity will be higher, and the weighting in US Equity will decrease.
As a result of this portfolio review, the following fund switches are being recommended:
– Replace the Schroder Tokyo fund with the T. Rowe Price Japanese Equity fund
– Replace the Artemis Income fund with the Castlefield CFP SDL UK Buffettology fund
– Introduce the AXA IM Global Short Duration Bond fund
– Remove the JPM US Equity Fund and the Artemis US Select Fund
In addition to these specific fund switches, and as mentioned earlier, there are recommended changes to the proportion of your portfolio which is held across some funds. The following table should help to illustrate these changes:
T. Rowe Price Fund
Over the long-term, the Schroder Tokyo fund has performed well but has recently been left adrift by its peers. Of course, performance is not everything; however there are growing concerns about the age of the fund manager and that there is no clear succession plan in place.
It is for these reasons that the T. Rowe Price Japanese Equity fund is recommended to take the place of the Schroder fund. This is an alternative Japanese equity holding which is managed by a well-resourced, experienced team with a good track record.
Whilst there is no fundamental issue with Artemis or the management of this fund, it is advised that exposure to Income funds is reduced overall in this environment of rising yields. When yields on fixed interest funds rise, this reduces the attraction to income producing equities as high returns can be found elsewhere, in less risky assets; this, in turn, reduced the value of the income equity.
The Castlefield CFP SDL Buffettology fund aims to achieve something completely different in a competitive sector in terms of process and approach. They have a unique method of analysis which is described as time consuming, but should pay off in the long-term. This fund is different to most other UK Equity funds as it is unlikely to hold any assets in mining, oil/gas, banks or pharmaceuticals.
AXA IM Global Short Duration Bond
The final fund to be introduced is one which occupies the global short duration bond space; this sector is expected to provide better long-term returns than global index-linked bonds, the weighting in which is being reduced to accommodate this new fund. There are not many funds from which to choose in this sector, however the AXA fund is domiciled in the UK which makes it appropriate for tax purposes. Whilst this fund is not yet rated, the same team manage a number of highly rated funds within AXA and so they are well known. AXA also have a considerable fixed income resource.
Removal of US Funds
With the recommended reduction to US holdings from 11.5% to just 5%, there is no longer the need to hold 3 funds in this space. As previously mentioned when writing about the Artemis Income fund, the JPM US Equity Income fund is being removed on the same basis: that income funds are no longer appropriate in this climate of rising yields.
Since only a single fund is required in the US sector of the portfolio, the HSBC fund has been deemed the most suitable to fulfil this role. This will result in the removal of the Artemis US Select fund, although there are no fundamental issues with this investment.