The findings from Natixis Global Asset Management’s latest UK Portfolio Barometer highlights how UK investors increased their appetite for risk in the final quarter of 2016, rotating out of fixed income into equity strategies.
The UK Portfolio Barometer, which tracks and offers quarterly insights into activity within 108 UK risk-rated model portfolios, found that in the fourth quarter of 2016, conservative, moderate and aggressive portfolios all saw rotations out of fixed income and into equity and alternatives.
There was increased appetite for risk among UK investors in ‘Moderate’ model portfolios as they shifted out of global and UK large cap sectors into UK Small Cap, while ‘Aggressive’ models followed a similar pattern, as UK investors reduced global, UK and US large cap exposures, instead moving into UK and US small cap, as well as Japan.
However, conservative models remained risk averse, largely shifting out of sterling denominated Fixed Income allocations specifically and moving into cash.
James Beaumont, international head of Portfolio Research & Consulting at Natixis said: “‘Risk on’ seems to have been the mantra of the final quarter of last year. In fact, the net effect over the quarter was positive for risk, specifically developed market equities, and negative for bonds.”
“An important point for UK investors to keep in mind in the current environment is to factor in the impact that currency risk can have on their portfolios. Looking at the data for last year, we can see how significantly portfolios benefitted from holding non-sterling assets as the pound depreciated following the Brexit vote in June 2016.”
Matthew Riley, head of Research of the Portfolio Research & Consulting at Natixis adds: “From a UK perspective, the most significant decision for an investor last year was how much currency risk to take, either intentionally or unintentionally. Specifically, holding non-sterling assets, unhedged, would have significantly benefitted UK investors but currency volatility is notoriously difficult to predict and some form of hedging may be advisable for investors going forward.”
He adds: “Although the year-end numbers for various market returns ended on a positive, there was significant volatility on the path they took to get there – across asset class and region. As a result, it is important for investors to understand all of the risks in their portfolios and, where necessary, seek to mitigate these.”