IBOSS Asset Management’s Chris Metcalfe has moved to record levels of gold and cash in his funds over concerns of even more unprecedented monetary policy from central banks and high valuations across the board. 
Metcalfe (pictured), who oversees the IBOSS risk-rated multi-asset fund-of-funds range, is now sitting on cash levels between 34 per cent in his lowest risk portfolio and 5 per cent in the highest risk MGTS IBOSS 6 fund.
“Even in our riskiest Oeic we’re holding 5 per cent explicit cash and we’ve never held anything like that before,” the manager said.
Meanwhile, the manager said he has a 3 per cent weighting to physical gold ETFs in each of his strategies.
“Everybody has an opinion about gold but from a valuation point of view and given the risks to the system, I don’t think that’s a bad defensive play,” he noted.
“Plus, gold was selling off as inflation expectations were growing and in some cases those expectations have rolled over already, so you haven’t really got that much opportunity cost to it.”
He added that while it is hard to value gold, with bond, equity, property and infrastructure markets all looking particularly expensive relative to history, he is happy to hold the asset class.
The biggest reason for this increased weighting to defensive assets across his fund range is the uncertainty surrounding central banks.
So far, central banks have kept interest rates low and continued with their quantitative easing measures.
This has had a profound effect on the bond and equity markets, causing the correlation of the two asset classes to become more aligned, particularly this year as the below shows.
Performance of indices YTD
Source: FE Analytics
Bonds and equities both rose as political events in Europe were passed without too much disruption, yet hawkish rhetoric more recently from the European Central Bank (ECB) and the Federal Reserve have caused the market fall away in the last few weeks.
And this has been one of the biggest problems for asset allocators, according to Metcalfe. 
“It is fascinating to watch. Today you have got bonds and equities rising and falling at the same time which is not how the textbook says it is supposed to be,” he said.
“On the back of the ECB coming out with super-dovish comments [equities and bonds rose], yet what we saw around the 25 June, when central banks including the ECB and the Fed were collectively making more hawkish noises, was equities and bonds fall at the same time.”
“This is the biggest issue for portfolio construction – that the bonds go down equities go up argument I don’t think really holds right now.”
With this correlation, more emphasis is being put on whether central banks will tighten their monetary policies and how quickly will do so, as both asset classes will likely be affected negatively by such moves.
Metcalfe said central banks can continue on their current path but will eventually “run out of rope” forcing them to “sober up” and begin the hawkish moves they have been discussing but so far not acting upon.
Yet, he fears that they will re-enter the market prematurely if a correction seems likely.
“One of the difficulties we’ve got as asset allocators is I think the central banks have become used to being very important and centre stage and I am not sure how long they would leave it in any sort of market sell-off or any event where markets were struggling before they came back in,” he said.
“The question is what are they going to come back in with and the only thing left is helicopter money because, of all the money they’ve printed previously, only a smidgeon went into the real economy and the rest went into increasing asset prices.
“The problem is with the helicopter money concept is we have absolutely no idea where that goes, which is why I think it is worth holding assets like gold and extra cash.”
The other reason he remains bearish, as mentioned above, is the increasing asset prices which have been precipitated by the increased liquidity in the system.
He noted that while investors in the highest risk Oeic 6 have signed up for a relatively high degree of risk, as a long-term manager he is trying to avoid expensive markets rather than time the exit of such markets and is therefore happy to take a more cautious approach.
“Markets are just generally expensive. On cyclically adjusted P/Es [price/earnings ratios] the US, I think, is back to being the most expensive again,” he said.
“The counterargument would be that CAPE [cyclically adjusted price earnings] is a bad predictor of market corrections, which we agree with – it is.
“But we are not really bothered about the timing of the market correction, what we are bothered about is long-term investor returns and what is undeniable is that if you go into markets that are super high relative to history you’re probably going to have a poor outcome.”
Indeed, as the below shows, the US market is at its highest point in the last 20 years, closing at a record high of 2,477.08 on Tuesday.
Performance of index over 20yrs
Source: FE Analytics
Yet Metcalfe has no explicit US holdings in the portfolios as he remains wary of the high valuations.
“If you have a CAPE of 30 we are probably going to be underweight,” he said.
“If you just listened to the headlines you would think the American market was roaring away but actually these increases are so small that while it makes for good headlines there is not a lot behind it,” the manager added.
Indeed, over the last year the index has been one of the worst performers, returning 5 per cent compared to the return of 7.26 per cent of the MSCI World index.
“One of the reasons we have performed so well in 2017 is that the US is the poorest performing developed market despite the fact that every day it seems to make a record high,” the manager said.