Death throes?
Wood-Smith recognises there are some key risks to the overall positioning. For example, maybe it really will be different, this time. Valuations will be sustained by earnings and the technology companies on huge multiples of earnings will continue to trade at those levels. He says: “If it really is different this time we might have another 10 years of this bull market to go. We are currently 20% underweight equity versus the benchmark and that would really hurt our relative returns. Although we can find some really good stocks.”
He believes the key to navigating these potential risks is to retain a strong focus on value. This means rigorous research and security selection.
All of the Hawksmoor investment management team contributes to the investment process and the strategy is agreed by all participants. At the same time, the group will draw on third-party research to inform their investment strategy and decision-making. They usually use collective investments but will make some direct investments for the UK portfolios of larger clients (£300,000+).
Wood-Smith says the portfolios are run with a simple philosophy, “to increase the wealth of clients”. He believes it is possible to achieve this without taking excessive risk.
For now, markets are enjoying a last hurrah, but the party appears to be dying. Risks are mounting and it is only so long that investors can shrug off high valuations and political risk in the US and UK. However, Wood-Smith is aware that parties can go on longer than people expect.
Five key themes
Genuine value
We have positioned our portfolios cautiously for quite a long time now. This is primarily because of our inability to find enough assets that we believe offer genuine and sustainable value. There are still a few pockets of value to be found, but financial markets are mostly a case of the already expensive becoming even more so.
If in doubt
The conventional wisdom about how to treat uncertainty has turned 180 degrees. The current thinking is, if in doubt buy equities – ideally low-cost passive equities so you don’t actually have to make any difficult decisions or worry about what is in your equity weightings.
US rates
The US Fed looks as if it is going to raise rates by a further 0.25%. It should also start to explain how and when it is going to reduce the size of its huge balance sheet. This is important for how portfolios will behave over the next year.
Full employment?
Disinflation, or deflation, is entrenched by misleading employment statistics. Unemployment figures may be at record lows but this fails to take account of zero-hours contracts or under-utilised part-time workers.
Balancing act
We are always prepared to look at asset classes and funds that may initially appear to have a higher-risk profile, but when blended with other holdings can produce attractive returns with more defensive qualities than many other funds in the sector.
