Quilter’s WealthSelect managed portfolio service has increased its allocation to European equities in its final scheduled rebalance of 2021, as portfolio manager Stuart Clark hailed the region’s attractive valuations.
The move has coincided with a reduction in exposure to UK and Asian equities, despite arguments that the UK is also trading at an attractive value.
According to Clark, “additional headwinds” for the UK are expected, as inflation continues to rise and the ongoing political fallout from Brexit is likely to continue into 2022.
Quilter said the portfolios also saw a reduction in exposure to Asian funds due to the uncertainty surrounding the expected level of returns from the region.
Environment, social and governance (ESG) factors were also cited as a reason for the reduced exposure to Asia, although the portfolios remain overweight the region, while Europe is still underweight.
Across all risk bands, Quilter said that exposure to the UK has been reduced from a slight overweight position, relative to its strategic asset allocation, to marginally underweight.
“Despite recent volatility creeping into the market, asset prices continue to go up but are not being driven by fundamentals. Moving into the new year there is a unique set of challenges facing investors, with inflation fears persisting and concerns that central banks may act too late when it comes to dialling down the monetary support,” said Clark, WealthSelect and Quilter Investors portfolio manager.
“The UK in particular is facing a unique set of circumstances. Unfortunately, the fact it is cheap relative to other areas of the market means nothing, as uncertainty remains ever-present. The reintroduction of political ambiguity is no good thing, particularly given the problems ongoing from the Brexit deal,” he added.
Elsewhere, in the alternatives space, Clark has been adding to the PIMCO Dynamic Multi-Asset fund to provide exposure to areas of the economy set to benefit from the green and digital transition.
Clark reduced the interest rate duration of the portfolios by trimming exposure to gilts in order to reduce the overall allocations to fixed income.
“While other markets have slightly better prospects, complacency appears to still be a feature in investors. As a result, the returns experienced in 2021 are going to be incredibly difficult to match and we wanted the portfolios to reflect this, with equity exposure reduced slightly in favour of alternatives,” he said.
“Diversification and different drivers of returns are going to be crucial in 2022, so adding to the PIMCO Dynamic Multi-Asset fund seemed a prudent decision given its exposure to equities and areas of the economy we expect to benefit over the long-term.”
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