Wednesday, 21 August 2013

FG Portfolio Change: Adjusting for Volatility

Today we initiated some changes in the FG portfolio which are explained below.

Sell First State Global Emerging Market Leaders and Baring ASEAN Frontiers

These sales have been made as part of a tactical asset allocation decision. With Fed tapering still a major issue and sentiment towards Emerging Markets not improving there is a likelihood for a further fall should the Fed signal tapering in September or October. The current P/B of many EM countries is very attractive and long term investors could see strong upside. Our tactical decision is to wait for further volatility before buying back in at hopefully cheaper prices.

Increase Ignis UK Absolute Return Government Bond

Our base case is for developed bond yields (Treasuries, Gilts and bunds) to continue to rise. There is a knock on effect for all fixed income which is priced off these government bonds. The Ignis fund’s strategy allows it to make money from these rising yields, which we find very attractive. At the same time it provides diversification to our equity holdings, helping to smooth volatility within our portfolio.

Increase 3x Short Euro Long USD

The Euro and Sterling have shown remarkable strength against the USD over recent weeks, making the entry point for this top-up very appealing. Should Bernanke signal tapering, then we are likely to see the USD strengthen. With Draghi keen to keep policy very accommodative in the Eurozone we think this should lead to a weakening of the Euro against USD. Another benefit of this trade is the protection against a tail risk of the German elections. If Merkel does not get back in there will be question marks over the Eurozone and this will likely lead to a weakening of the currency, helping this trade. With all currencies they need to be monitored very closely. From these levels we can see short term upside of 15%-25% as this is a leveraged trade, and we will evaluate along the way.

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