There’s plenty to worry about in financial markets these days but risks are not materially worse than most years –it just feels like they are, according to Rathbones’ David Coombs. 
Investors have been given plenty to fret about in 2019, with markets being affected by events such as the Brexit-inspired political uncertainty in the UK, the trade war between the US and China, the protests in Hong Kong, sluggish global economic growth and questions over the direction of monetary policy.
But does 2019 have more to worry about that past years? Coombs (pictured), head of multi-asset investments at Rathbones Unit Trust Management, thinks not.
“Everyone talks about Hong Kong protests, trade wars, Brexit, Trump’s tweets – everyone’s aware of them. But there’s a danger that there’s other stuff going on that people aren’t focusing on,” the manager said.
Performance of global equities and government bonds in 2019
Source: FE Analytics
“There’s the known risks that the market started to deal with you and navigate but what we’re trying to focus on is the fact that are the other there are a lot of other risks out there. Turkey has just gone into part of Syria, for example, Saudi Arabia and Yemen are in a war, refineries are getting blown and there is a lot of other stuff happening out there.
“I think there always is, to be honest, but everyone’s just much more aware of politics these days and therefore it seems bigger and more relevant. It’s on the front page and not just the business pages, so it’s all around us and it feels all-encompassing at the moment. The man on the street knows about trade wars and Huawei – it’s not just in an FT article any more.”
But in response to the multiple of risks on the horizon, Coombs has adopted a cautious stance in his multi-asset range, which includes the £536.7m Rathbone Strategic Growth Portfolio, £266.4m Rathbone Total Return Portfolio and £87.5m Rathbone Enhanced Growth Portfolio fund.
“Our portfolio is pretty defensive,” he said. “Risky equities are neutral in terms of our risk budget. But we are not in traditional defensive value, we are defensive growth – which I know is not very trendy at the moment – with a bias to the US.”
His Rathbone Strategic Growth Portfolio, for example, currently has 64.22 per cent in equities; this is from a potential range of 40 per cent to 80 per cent.
US growth names found in his range at the moment include professional services company Accenture, payment firms Visa and Mastercard, makeup giant Estée Lauder, cable producer Amphenol and tech stars Google, Amazon and Adobe.
Alongside these growth stocks, the funds own a few value names such as banks and oil companies, to ensure they are not exposed to just one investment style.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Within the fixed income space, Coombs is predominantly investing in sovereign bonds with a mixture of Japan, Singapore, Australia, the US and the UK. He sees little value in corporate bonds or high yield so has very low exposure there.
Rathbone Strategic Growth Portfolio has 11.26 per cent of assets in conventional government bonds, with just 1.25 per cent in corporate bonds, 1.63 per cent in emerging market debt and 0.67 per cent in index-linked bonds.
“I think government bonds offer value, not necessarily in terms of returns, but as a diversifying asset at the moment given the very poor liquidity in fixed income markets and the not great liquidity in equity markets,” the manager said.
“Having the liquidity of sovereigns and their safe haven status, given the headwinds in the global economy and I think they do give you a lot of value in terms of some protection and comfort right now.”
Some commentators have argued that government bonds are no longer the safe havens they once were, thanks to an increasing correlation with equity markets. However, Coombs put this down to the fact that bond markets were pricing in a recession while equities weren’t.
“This was two uncorrelated assets taking opposing views and, of course, that meant they became correlated. Whilst they were both going that way, yes, they became correlated to one. But I wouldn’t read too much into that,” he explained.
“I think the bond market was right in forecasting slowing growth and that is backed up by the Fed now being on a reducing rate trajectory. I think the bond market was spot on: there is no inflation anywhere and growth is anaemic, so I think the market was reflecting it.
“The equity market was staying high despite that and you had this ‘who’s right’ situation. My view is if we start to get a negative growth shock, you will see the equity market sell off significantly and yields will fall until that negative correlation will be resurrected. And that’s why I think there’s value in sovereigns from here.
“But if global growth recovers and this was just small mid-cycle blip, then I would expect those yields to rise and I’ll lose money on those gilts but that’s okay. I don’t like losing money but ultimately you want to your insurance to lose you money and the growth part of my portfolio will be doing very well.”
When it comes to alternatives, the Rathbone multi-asset range has very little exposure aside from some S&P 500 put options, gold and oil.
“I don’t see any value in UK property at the moment, I don’t want to be in CTAs [managed futures strategies] because markets are too volatile and there’s too much uncertainty around, and I don’t want to be in infrastructure because of the political risk,” he concluded.