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21st November 2016
In a changing world, how are wealth managers hedging risk

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In the fog of uncertainty after the Brexit vote and Donald Trump’s election victory one thing is painfully clear, political risk is changing into something very different.

While there is nothing new about polls being inaccurate, 2016 has undoubtedly given us the rise of populist politics. With many predicting the same to follow across Europe in the next 18 months, investors are faced with considerable challenges they need to navigate.

‘There will always be political risk, but I worry about these things in conjunction with struggling monetary policy, demographics, low growth and possible bond bubble – that’s quite a cocktail.’ said Dan Boardman-Weston head of portfolio management at BRI Wealth Management.

Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, says he is not surprised by the current situation and the firm has been derisking its portfolios for some time in anticipation. He said: ‘It’s not a shift from the left or the right, instead it’s a shift away from the middle.

‘What we are doing is hedging currency exposure risk to places where they are printing money. As QE (quantitative easing) has failed, the risk is that due to enhanced correlations, bonds and equities will fall together as they have risen together. So we have been overweight alternatives, which includes absolute returns and for the first time in a long time we have bought into gold.'

Over at BRI Wealth Management, a similar approach has been taken. Boardman-Weston has also been working to derisk his portfolio and says in the face of potentially greater political change that cash is a viable option.

‘Having a portion of the portfolio in lower risk assets such as short-dated bonds does help and we like cash,’ Boardman-Weston said. ‘Yes, there are alarming expectations about inflation, but inflation has not moved up a huge amount and it is still useful in case we see opportunities. It helps as a buffer.’

In terms of opportunities, in the volatility after Trump becoming president-elect, Boardman-Weston used some cash to top up positions in defensive names which sold off: ‘The market was not as violent as we expected. Bond yields moved around rapidly. That affected a lot of the more aggressive bond proxies, such as utilities and tobacco, there were big price moves there. So we were able to buy and top up some positions and we like that because the fundamentals are still sound.’

Although, SYZ Asset Management co-head of multi-asset Hartwig Kos is sanguine about risks from political change, he is still hedging out some of his risk.

‘It’s all about the market sentiment, the market always likes to worry about something and will focus on one key event at a time,’ said Kos who is being more objective when it comes to estimating how elections will play out.

‘You cannot listen to polls anymore. We instead focus on asset prices and try and see how different scenarios are being priced in. It also helps to go out and listen to the people. One of the problems with Brexit is there was a complacency with Londoners just listening to Londoners. It’s very important to get other people’s perspectives and try and see what the public sentiment is.’

The bulk of upcoming elections are in Europe where right-wing Eurosceptic parties have been gaining ground. With the UK already voting to leave, the possibility of other nations exiting the European Union is gaining credibility. But this has not dampened the continents investment prospects for wealth managers.

Seager-Scott said: ‘The areas we are neutral are UK and Japan. We have a more moderate overweight in Europe. We have to be wary of the risks but there are companies there that will grow regardless. For instance, there are a lot of European countries outside of the Eurozone we could invest in.’

Likewise, Boardman-Weston is pragmatic and said: ‘We have a good bottom-up stock picker with the Baillie Gifford Europe fund, which has done well. European companies are slightly cheaper but political risk is potentially greater.

‘There is a lot of uncertainty there with other countries potentially leaving the EU. But on an underlying level, there are some great companies. But I would not be increasing allocations at the moment.’