Asset Allocator is always interested in finding out how, why and when DFMs go about protecting portfolios from downside risk in a world of uncertainty.
The folks at Brown Shipley, part of the gaggle of private banks owned by Quintet Group, told Asset Allocator they have taken out an ‘equity insurance instrument’ to shield clients should things turn sour in markets.
So far, of course, this is yet to materialise, but chief investment officer Daniele Antonucci would rather be safe than sorry.
“It's a derivatives strategy, so if there was a drawdown that occurs until the end of the year, it goes through the US election and is for both US and European equities,” he said. “If it goes below the level at when we bought it, then we would have an offset in the portfolio – a partial offset.”
“That is a tactical overlay that allows us to stay fully invested to carry forward our equity exposure. So essentially, it’s a way to prepare for scenarios outside your base case.”
Another way he aims to protect portfolios from geopolitical risk is through a sizeable position in broad commodities of around 3 per cent. We say sizeable because the average among the allocators we cover is a mere 0.7 per cent, with most allocators inclined to stay out of this asset class altogether.
Antonucci says this is aimed at minimising supply chain disruptions while incorporating metals like copper to take advantage of tech innovation in the future.
Cut out the middle man
Brown Shipley’s balanced model portfolio contains around 40 direct stock holdings alongside a fund–of-mandates partnership with BlackRock.
Their largest position is in Microsoft, with around 80 per cent of the rest in other US tech names. Brown Shipley tends to hold these positions for at least three years and says there’s value added in the process of bottom-up security selection.
By way of comparison, the most recent Nextwealth report highlighted that only nine of the 50 DFMs they surveyed held direct equities, typically the more traditional wealth managers such Waverton and Charles Stanley.
More broadly, then, the team's single greatest exposure is to US equities, while remaining underweight European stocks. Antonucci said that election risk is now prevalent in France owing to the rise in popularity of far-right political parties, as opposed to the UK, which is a contest between centrists.
The private bank also continues to back its global small-cap position, adding to the ever-growing list of DFMs who support the little guys. You can read more about this trend here.
