Partner Insight: Columbia Threadneedle Investments' Toby Nangle, manager of the Threadneedle Dynamic Real Return Fund, explores how to price assets given negative investor sentiment
What are some of the key challenges investors are likely to face during the rest of 2018?
The most important issue we face is on the trade side. We have a US administration throwing trade grenades at its major partners. Macro economists may say that the impact on GDP growth from these events will be relatively small, but this tells you nothing about the distribution of the impact on specific companies. This can be quite immense.
I see people are worried, because they are not sure how to price things and this is being reflected in the rating of the market. It is hard to see how the trajectory of the trade distortions will affect the market ratings, and that is worrying.
We are taking the approach of focusing the portfolio on favoured risky assets, avoiding a lot of corporate credit risk that could be particularly vulnerable, and not getting over-exposed too early to risky markets.
How much of an impact do Brexit negotiations have on the portfolio and how do you navigate this risk?
The day by day commentary and expectations around the negotiations have quite a big impact on the portfolio. The target I am aiming to deliver is in sterling, and this is the most volatile measure of how Brexit negotiations are developing.
We look at a variety of scenarios and how the portfolio will perform in each of these. Today, the most likely outcome seems to be that we get a withdrawal agreement, so this could all be a rehearsal for a more profound period of uncertainly in two years' time.
But there is also a not inconsequential possibility of a Brexit with no deal, which would be extremely bad for sterling. In this case, the fund would be able to protect investors by hedging sterling exposure.
We also hedge around one-third of our European exposure back to sterling to reduce some of the volatility of sterling moves against the euro. But sterling weakness can also lead to good returns in European equities and some large UK stocks, because of the non-sterling base of these companies.
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