Greystone WM: Why we are at our maximum US underweight

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Greystone Wealth Management is currently at its maximum underweight to North America given the historically high valuations seen in the region. Meanwhile it is rotating marginally from growth into value strategies.

The multi-manager team, headed by investment director and head of multi-asset James Menzies, said the rise in volatility seen in recent years has led to valuations becoming increasingly stretched, with the gap between value and growth now even wider than at the peak of the dotcom bubble.

Against an investment philosophy of "disciplined risk-managed investing", Greystone seeks out attractive investment opportunities suited to various market conditions, risk parameters and geographical "bandwidths".

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Fidelity American Special Situations is one of their chosen funds with a greater value focus, which has enjoyed a slight tilt in its direction in recent weeks.

The fund sits in the VT Global Growth portfolio alongside Baillie Gifford American, BMO North American and Merian North American Equity, as well as a US equity tracker from Vanguard.

The global fund currently has 45% direct exposure to North American equity-based funds, with the Polar Capital Global Insurance fund, which is a sector specialist but still invests mainly in US equities, nudging the weighting closer to 50%.

Other current US preferences appearing in both the Balanced Managed and Global Growth funds include Artemis US Extended Alpha, Majedie US Equity and Polen Capital Focus US Growth.

Alternatives exposure

Elsewhere, Altrincham-based Greystone is favouring the opportunities presented by the alternatives space and, in
regional terms, across Asia and emerging markets.

Menzies said the team has been overweight alternatives for "some time", expressed via physical property, listed infrastructure and "directional long/short managers", such as the European long/short offering from Carmignac and Merian's Global Equity Absolute Return fund.

He favours alternatives to help offset broad equity and bond market risks and holds 24% in the Conservative Managed fund, 21% in Cautious Managed and 22% in Balanced Managed.

Meanwhile. the team's core Asian holding is Tom Naughton's Prusik Asian Equity Income fund, whose strong track record of finding quality has made it a long-standing inclusion across the range.

While the team does not deliberately seed funds, avoiding the liquidity risk of holding too much of a fund's total assets, Naughton was one manager they supported from an early stage, which has delivered "excellent" returns for the team.

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Menzies is supported by James Jackson as head of investment research, and investment analyst Chris Jeavons, and Greystone also takes on a university intern each year.

The range also houses a Cautious Managed and Conservative Managed fund, with roughly £300m in assets under management across the four funds. The vehicles were initially launched in 2005 to serve Greystone's internal client needs but are being rolled out externally.

Another early purchase was the SDL UK Buffettology fund, run by Keith Ashworth-Lord of Sanford DeLand.

Menzies said: "We first invested when it was around £40m. It is now over £1bn and we still hold it today. The fund's consistency in its approach - as a bottom-up stock picker, focusing on quality franchises and looking for strong company management teams - makes it easier for us to work into a portfolio."

Equity allocation

Overall, the team's current equity exposure is 78% in Balanced Managed, which sits in the IA Mixed Investment 40%-85% Shares sector and has been the biggest contributor to recent returns. The allocation is split equally between UK and non-UK equity funds.

Menzies said he thought
much of the negative newsflow hitting the UK had been priced into markets, but acknowledged there was the potential for further falls if uncertainty remained at current levels.

He added: "In June 2016, markets headed into the UK's referendum relatively optimistic regarding the expected outcome of the vote, which made the reaction to the actual result that much more severe.

"Despite sterling falling to a 31-year low versus the US dollar following the result, our portfolios rose in value due to the extensive diversification we maintain.

"We will continue to diversify our portfolios in order to offset short-term bouts of volatility and maximise the long-term growth potential."

The team's underweight to UK gilts and longer-duration bond funds has held back returns recently, but has served its purpose of dampening down volatility.

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Beyond the UK, Menzies' concern - like many - is centred on the slowdown of global economic growth, US/China trade tensions, central bank monetary policy and other geopolitical risks.

On fees, he defended his traditional fund-of-funds approach for bringing lesser-known, specialist fund managers that are not as readily available on platforms to clients.

"The extra layer of oversight lets us invest in the best of these managers while avoiding the pitfalls - well-known recent events have shown that these do exist, even for fund investors."

He added: "While traditional active management introduces additional costs, we believe that over the long term, we can offer better risk-adjusted returns for our investors."

Over five years to 30 September, Greystone Balanced Managed returned 46% against the IA peer group's 39%, while the Global Growth fund returned 78.2% versus the IA Global category's 69.7%, according to FE.

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