He says investors typically want an additional return from equities to that offered by bonds or cash as compensation for the additional risk being taken, this is known as the equity risk premium.
McEntegart notes that “the equity risk premium is low” at present, but he has increased his exposure to equities in his multi-asset fund to 32 per cent from the previous 28 per cent as a result of cheaper valuations.
Thirty per cent represents a neutral allocation to equities in his fund, so at 32 per cent he is slightly overweight.
‘Quality companies’
The equity exposure McEntegart has is concentrated in what he calls “quality companies”, by which he means businesses with relatively low levels of debt.
He explains: “We have about 25 per cent of the equity allocation in a range of technology equities. And in this market, some tech equities are behaving like defensives. Rising interest rates and bond yields mean that the cost of capital is rising.
“The companies with less debt and those who have funded themselves such that they do not need to refinance in 2023 and 2024 are clearly in a better position. In contrast, companies that we are not keen on have a lot of debt and where debt needs to be refinanced near term and/or where debt is in the form of loans [where the interest payments rise and fall with moves in base rates].”
David Thorpe is investment editor at FTAdviser
