In a recent note we discussed our regional exposures in the portfolios. In this week’s note we focus on sectors, highlighting our preferred sector exposures.
Our regular readers will be aware that our asset allocation decisions are for the most part driven by data. Therefore, with global growth still robust, corporates reporting generally solid earnings, and inflation and interest rates at unthreatening levels, it is unsurprising that our portfolios are still biased toward cyclical sectors like materials and industrials. These are economically sensitive sectors that tend to perform well in a positive economic environment and have done so since early 2016. In addition, many of these businesses, for example the mining companies, are hard asset businesses that can act as a hedge against rising inflation.
The other important driver in our decision making process is price momentum, and this year we have seen the momentum in some of these cyclical sectors fade a little, namely in materials, industrials and financials. This is most likely because of rising concerns around trade wars and some signs of growth rates slowing in several regions, albeit from very high levels. On the back of this we have sold most of our financials and have diversified around our base case exposure to basic industries by introducing some positions that we consider to have more defensible growth.
Energy is a sector that appears to be a good diversifier and ultimately quite defensive as it can benefit from many factors, including inflation and geopolitical instability, which can be negative for equities. Therefore, we have been increasing exposure here over the past few months. Energy has been one of the best performing sectors this year and with ongoing supply side constraints we think that the momentum in the oil price is arguably underpinned.
The technology sector has been the other standout performer this year, supportive of the fact that many of these companies continue to achieve huge and resilient earnings growth, and is another sector that we have been adding to over the course of the year. However, importantly in a sector that is very concentrated in just a few stocks and prone to huge individual price moves in these stocks, as we add here we endeavour to keep our exposure very well diversified. Our technology exposure spans the US, Europe and Asia, and from a sub sector perspective is spread across healthcare, industrials and consumer technologies, including both online retail and online gaming. We also try to keep our individual stock risk fairly low by buying ‘boring’ stocks at weights that are sensible in regard to their contribution to portfolio risk, and we never consider index weights.
We do have a small position in some of the more traditional defensive sectors such as consumer staples and infrastructure, but this is limited to companies where the opportunity for consistent demand growth is still very clear to us. Looking at the consumer staples sector more closely, it seems only logical to avoid tobacco companies that are struggling to replace the demand for their traditional product with substitute vaping products. Instead we own consumer facing businesses in India and South Africa that are benefitting from rapid population growth. Similarly we have bought some agricultural producers benefitting from the growing challenge of meeting global food demand. In infrastructure, we have introduced some hard asset non-cyclical businesses that can also act as a hedge against rising inflation, like pipelines and airports.
The fundamentals are still strong and in this risk-on environment we would still expect risk assets, specifically cyclical equities, to outperform. With that said we have added to some areas that we think can defend against rising inflation, to keep the portfolios well diversified.
Past performance is not a guide to future returns.
The value of stock market investments will fluctuate and investors may not get back the original amount invested.
Forecasts are not reliable indicators of future performance.
For funds investing globally, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
Changes in interest rates will affect the value of, and the interest earned from bonds held by the fund. When interest rates rise, the capital value of the fund is likely to fall and vice versa.
For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.
Source for information: Miton as at 01/08/2018 unless otherwise stated.
The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.
Miton has used all reasonable efforts to ensure the accuracy of the information contained in the communication, however some information and statistical data has been obtained from external sources. Whilst Miton believes these sources to be reliable, Miton cannot guarantee the reliability, completeness or accuracy of the content or provide a warrantee.
Issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.