A benign market environment means the team at Quilter Cheviot won’t be taking significant top-down asset allocation decisions, although they maintain slightly underweight positions in fixed income and property as well as an overweight to international equities.

As part of the series in which FE Trustnet looks at the model and managed portfolios on offer to UK financial advisers, we spoke with Quilter Cheviot managed portfolio service (MPS) lead manager Simon Doherty about the firm’s process, current positioning, recent performance and outlook.

Quilter Cheviot offer a suite of model portfolios that are actively managed by a dedicated investment team, meaning it sits somewhere between a model and a managed service.

The team takes its top-down allocations from the wider views of Quilter Cheviot, with recommendations coming from the centralised investment process.

“I chair our investment funds committee and the rationale behind that is that MPS is entirely fund-based,” Doherty (pictured) said, adding that he also sits in on the asset allocation committee which is where the products get their tactical asset allocation overlay.

“It’s helpful in ensuring that we are capturing our views as a business, that we are replicating those views in MPS.”

“We have areas of expertise within the business and from my perspective it would be remiss of me to go and apply only my own views, especially in a service like MPS which is a company service on behalf of investment managers across the business,” the manager said.

However, he noted that it is not management by committee solely as there is a dedicated investment management team that the MPS strategies are looked after by.

Doherty runs seven portfolios – cautious, growth, balanced, global income, conservative, global growth, and income – with four more index-only versions.

“We’ve grown it to a point where we can offer something for more or less every investor who comes to us with a time horizon of 12 months plus,” Doherty said.

Portfolio construction

Source: Quilter Cheviot

The portfolios are rebalanced quarterly but have the capacity to rebalance if they deem appropriate, differentiating it from a pure model portfolio service.

Generally speaking the portfolios allocate to the same funds across each of the investment strategies, however the risk is managed at the asset allocation level and the sizing of those individual ideas is changed depending on the appropriate risk bracket.

Key Overweight

The favoured area of the manager is Europe, where it is overweight due to improving macroeconomic data as well as an improving political backdrop.

 “The political risk hurdles that we’ve seen year-to-date have thus far largely been tackled and overcome without too much concern,” said Doherty, referring to the French and Dutch elections, which passed by without any significant market shocks.

“You are seeing Europe as a bit of a ‘safe haven’ politically, if anything and who would have thought that a little while ago?”

The markets reacted positively to these results, with the MSCI Europe ex UK up 13.88 per cent so far this year, one of the best performing markets, beating the MSCI All Countries World by 6.56 percentage points.

Performance of indices YTD

Source: FE Analytics

“It is an area that we have looked at very closely with recent political events that have been taking place and we like what we’re seeing in Europe – we’re still quite positive on the region,” the manager said.

As well as this, improving macroeconomic data and upgraded company earnings coming through have also benefited the region.

“European equity markets are benefiting from a return of a degree of confidence and you are seeing that in the form of flows to the region,” Doherty said.

The balanced portfolio has a 7 per cent allocation to the region, higher than the 4.5 per cent weighting of the benchmark.

However, while he is positive on the fundamentals of the region, the slightly higher overweight shows that he is not getting too bullish.

“What we see is a gradual tailwind to the region in terms of earnings coming through and some renewed confidence in terms of asset flows as well,” he said.

The manager has made some portfolio changes to reflect this in the latest rebalance, giving the portfolios a more cyclical balance.

In an upcoming article this week we will look at the fund he has added, the fund he has maintained a holding in and one that he has sold.

Key underweight

While the manager noted that there are no significant underweight positions in the portfolios, one area he has steadily been reducing exposure to is property.

The Balanced portfolio currently has a 4 per cent allocation to the sector – the lowest since Doherty took over in June last year.

“Commercial property we are certainly more underweight than we were this time last year or back at the beginning of 2016,” he said.

“We still maintain an exposure – 4 per cent there within the portfolio – but it’s not a huge percentage. You look at some of our peers and there is certainly a more sizeable allocation of that asset class.”

Property funds had a difficult time last year as the Brexit vote caused concerns over the health of the UK property market.

As such, the sector plummeted with many funds being forced to temporarily close in order to stem the tide of rising outflows.

Performance of index over 2yrs

Source: FE Analytics

Indeed, as the above shows, the average UK direct bricks and mortar fund has returned 5.79 per cent over the last two years with a large drawdown shortly after the UK’s decision to leave the EU in June last year.

Doherty said he would much rather allocate the funds it would take to make a neutral position in the sector to higher conviction ideas such as European and Japanese equities.

“We see the income attraction and the diversifying attraction of property but we don’t see a catalyst for any sizeable re-rating for the UK property market at this point,” he noted.

The manager does retain some exposure, as mentioned above, for the diversification and income benefits, with the Aberdeen UK Property Feeder Unit Trust and F&C Property Growth and Income representing two of its largest allocation in the sector.

“We are comfortable allocating there but there is nothing that excites us drastically at this stage within the asset class,” he added.

The manager is also underweight both fixed income and absolute return strategies – an area we will cover in more detail latest this week.

Performance

The Quilter Cheviot MPS was first made available to investors in 2001, making it one of the longest-standing ranges within the marketplace.

Initially launched with three investment strategies – Growth, Balanced and Income – the team has expanded the MPS range to seven strategies over the years with further launches in 2005 and 2012.

Since its inception the Balanced portfolio had returned 182.8 per cent to the end of June 2017.  This is 30 basis points behind its FTSE UK Private Investor Balanced index but 26.6 percentage points above the average fund in the IA Mixed Investment 40-85% Shares sector – a fairer comparison with relevant peers.

Performance of portfolio since launch

Source: Quilter Cheviot

Doherty became the lead manager of the range just days before the EU referendum in June 2016, and over the last year the fund has returned 15.2 per cent – 1.3 percentage points ahead of its benchmark but 0.9 percentage points behind the IA sector.

Yet it has improved so far in 2017, returning 5.1 per cent – 0.9 percentage points ahead of the FTSE UK Private Investor Balanced index.

The Balanced product is 35.4 per cent invested in international equities – a slight overweight – with 32.6 per cent in UK equities (neutral), 19.5 per cent in fixed income and cash and 12.6 per cent in alternatives, including property.

Since inception it has experienced volatility of 9.3 per cent and has a maximum drawdown of 26.3 per cent.

Of the two other products launched in 2001, the Growth portfolio has returned 217.5 per cent – above the FTSE UK Private Investor Growth benchmark and IA Flexible sector.

Meanwhile, the Income portfolio has returned 186.2 per cent, 20.1 percentage points ahead of the FTSE UK Private Investor Income sector and outperforming the IA Mixed Investment 20-60% Shares sector by 72.9 percentage points.

Outlook

Looking ahead, Doherty said he does not believe that bonds will offer much of a return for investors in the near term, nor will yields rocket. In equities, he said most markets look fair value but corporate earnings improvements and a generally strengthening global economy should benefit companies – albeit at more subdued levels than has been seen during the first half of the year.

“I think unless you go to the extremes at the current time it is very difficult to give a genuinely interesting outlook,” he said.

However, he warned that the stellar investment returns seen over the past 18 months are unlikely to continue in the second half of this year.

“Everyone is looking at the returns that we’ve seen in the last 12 months and you look from Brexit to today and you’ve seen phenomenal returns for investors,” he said.

Indeed, as the below shows, both bonds and global equities have performed well since the start of 2016, up 21.36 and 37.87 percentage points respectively.

Performance of indices since start of 2016

Source: FE Analytics

“Yet our chief investment officer is always at pains to stress that clients shouldn’t expect the same levels of returns that we’ve seen in the last 12 months for the next 12 months,” the manager said.

“If you look at equity valuations I think we would describe them as fair. You are seeing corporate earnings coming through and actually surprising a bit this year.

“This differs from the trend you typically get over the course of a calendar year where analysts are fairly optimistic at outset but then revised down time after time in the ensuing quarters.

“You’re seeing volatility also being at a pretty low level and you saw the first wobble for the bond markets in a little while in recent weeks,” he added.

“But given that we’ve had a pretty upward trending environment for bonds and equities until then in recent years it’s not surprising to see bond yields unravel a bit as we see the first hints of a return to normalised monetary policy globally.

“Base case our view is still generally constructive on the general economy and equity markets from here while we’re not expecting a huge level of return in bonds from here.

“However, nor do we think we are on the cusp of a drastic unwinding of gilt yields from here which I think a lot of people have been predicting for quite some time.”