Here at Asset Allocator we spend considerable time understanding DFMs’ weightings to specific instruments and regions.
Eren Osman, managing director of wealth management at Arbuthnot Latham, takes a strong view on currency risk. Usually, currency risk would be prevalent when investing in funds based abroad, as returns are converted back to sterling. His view, however, is that sterling on its own is the risk, and that investors should diversify their exposure away from it.
“I think there's a misconception that if you're investing globally, you're taking on currency risk,” he said. “My view is the other way around. If you're not investing overseas, you're taking on currency risk.”
Arbuthnot's allocation to UK equities within the global investment service is 6.1 per cent versus a neutral allocation of 3.4 per cent found in global index trackers. But this is significantly below his DFM compatriots, who, as we've covered before, hold a much larger 13 per cent exposure to the domestic market. In this sense, Osman's views on currency risk have seen him stray from the pack.
As one of the few private banks to offer an MPS, Osman is pleased with Arbuthnot’s expansion into the intermediary space.
He said the ability to use tactical allocation is an essential component of best managing client portfolios that can make the difference in returns.
“I think both strategic and tactical allocation are incredibly important pillars of investment management, and I think often brushed over in discussions with advising clients to the extent that it’s not really appreciated the level of value and differentiation they can still offer,” he said.
To illustrate this, Osman pointed to 2022 when equity-bond correlation got a bit too cosy.
When that occurred, he was able to use tactical allocation to quickly drive ‘almost 30 per cent’ of clients’ portfolios into alternatives throughout that year.
The ability to think on their feet meant that when the chaos receded, Osman then reduced his exposure to hedge funds, commodities, and property, and increased fixed income exposure by around 15 per cent.
“Risk isn’t static,” he said, and this is a danger for passive multi-asset investors who are limited in their flexibility to rebalance their portfolio weighting to equities, bonds, and alternatives, when bonds go haywire, as they did two years ago.
Stick to the plan
When choosing managers, Osman buys them for a clear purpose and wants them to stick by their guns especially during the leaner years.
“What we are particularly interested in with fund selection is consistency in application of their philosophy and process throughout the fund manager's tenure,” he said. “Deviation from that philosophy or process for us is the biggest red flag and concern as an allocator of capital.”
This doesn’t have to be every year in every environment, either, so long as the strategy is clear.
“As long as the fund managers are doing what we expect them to do, and they’re able to demonstrate some added value – not in every period – but generally in a consistent three-year rolling period versus their benchmarks, then quantitatively that's what we're interested in.”
