Not long ago we hosted the newly-installed head of investments of Portfoliometrix, Alex Funk, on the famed Asset Allocator Podcast.
This week we bring you the first raft of portfolio changes under his tenure.
The first thing Funk has introduced is a clearing out of UK equities, reducing their position to better reflect global weightings. Now, domestic bias looks like 10 per cent, with the proceeds funnelling into US equities instead.
What this looks like in practice is Portfoliometrix calling time on their Polar Capital UK Value Opportunities and Gresham House UK Micro Cap holdings so as to reduce the small cap and value bias of the portfolios.
Funk told us that the UK acts as a defensive low-beta market, so he wants to access it as such and not use it for other purposes, such as valuation calls.
Where the money is flowing instead is into the US and, having decided that this is his region of choice, Funk aims to capture as much of the investable universe as possible.
This comes in the form of the Vanguard US Index, which captures a whopping 3,600 stocks.
“I think if you're going to be taking a long-term strategic view, you need to optimise your entire investable universe and not just constrain yourself to 500 businesses,” he said.
“So if we want to give true diversification to investors, that [the S&P Total Return index] is the investable universe.”
He added that he was averse to the idea of the equal-weighted index as it takes an inherent view on size and introduces value into the mix, meaning, "you’d need a really strong investment thesis as to why that makes sense relative to market capitalization".
When used sparingly, Portfoliometrix favours using alternative investments as risk-on assets to chase returns for investors, rather than their more conventional use as risk reducers.
This translates to a predilection for Reits over hedge funds to deliberately capture extra volatility and exposure to the real economy.
The decision between using alternative assets to go on the defensive or the offensive is a matter we’ve covered in depth, investigating whether DFMs’ weighting to these assets drop off as risk increases.
We found that in allocators’ highest-risk portfolios, the use of alts is marginal at 2 per cent, which becomes 4 per cent when accounting for property and infrastructure.
So Portfoliometrix is definitely thinking outside the box with this one.
Lastly, the team has separated its short-term bonds from its cash to better understand their risks and protect clients from the recent increase in volatility.
“We then recycled into longer dated government bonds or market level government bonds,” said Funk.
“We think we are now at the end of the rate cutting cycle, right now the probabilities are definitely towards cutting rather than increasing, and therefore locking in some of those high yields over longer periods makes sense.”
