Smith & Williamson Investment Management’s has begun to inflation-proof its managed portfolio service (MPS) with the addition of the BlackRock Gold & General fund in anticipation of a pick-up in prices over the next few years.
While there’s a general consensus that pent-up consumer demand as a result of the lockdown and social distancing measures to tackle Covid-19 will lead to a short-term surge in inflation.
Some forecasters expect it to then level out while others believe other factors such as increasing levels of monetary and fiscal stimulus will converge to change the longer-term outlook.
In response to this, the team has added the £1.3bn BlackRock Gold & General fund across the portfolios in its MPS range, with gold an asset that is likely to protect against rising inflation and provide diversification.
James Burns, co-manager of Smith & Williamson Investment Management’s MPS, said the expectation of higher inflation, as well as tailwinds for other markets, had shifted its outlook for 2021.
“We haven’t seen inflation come through significantly yet,” he said. “But you want to have it in-play before it does, plus we’ve been overweight equities for a number of years now which is inflation-proofing to an extent.”
Gold had a landmark year in 2020, rising to a record high of $2,067 per ounce on 7 August 2020, as investors drove up prices amid the uncertainty of the Covid-19 pandemic.
This was seen in the performance of BlackRock Gold & General – managed by Evy Hambro and FE fundinfo Alpha Manager Tom Holl – which invests at least 70 per cent if its assets in shares of gold mining and other precious metals companies.
Performance of fund vs benchmark in 2020
Source: FE Analytics
Over 2020, the BlackRock Gold & General fund made a total return of 27.20 per cent against a return of 20.77 per cent for the FTSE Gold Mines index.
However, with inflation looking likely to pick up at some point – particularly with central banks unlikely to rein it in with interest rate hikes – conditions could benefit the yellow metal.
“The key driver of this view is the outsized impact of policy, particularly the deployment of fiscal measures on top of the monetary stimulus that has been repeatedly used over the last decade,” said Burns.
“We believe tail-risks of significant inflation may also be tilted to the upside, with the risk that policymakers are potentially building up more significant challenges in the longer-term and that the reaction function of central banks and governments might well be too slow.”
Indeed, the Smith & Williamson team believe gold and precious metal securities, while carrying some beta, should also provide some protection in challenging markets.
“While inflation was a consideration, gold is also a means of diversifying returns in this environment,” Burns said.
Gold is considered a viable hedge against inflation and currency debasement that can occur after periods of increased stimulus – a real concern considering that nearly one-fifth of all US dollars in existence have been created this year.
Elsewhere, the Smith & Williamson team has increased the allocation to the UK equity market at the expense of the US, in the view that much of the UK market is undervalued and US names are looking increasingly expensive.
In December, they took the opportunity to move to an overweight position in UK equities and underweight in the US.
“This was driven by what we believed to be excess pessimism towards the UK at a time when Brexit would soon be done – one way or the other – mass vaccine roll-outs were on the horizon, and the UK simply looked too cheap relative to virtually all other markets,” Burns noted.
The UK has lagged many of its peers in recent years due to the uncertainty surrounding Brexit, and also struggled to initially to get to grips with the developing pandemic.
Indeed, the MSCI USA index was up by 17 per cent during 2020, in sterling terms, while the MSCI UK index lagged behind, making a loss of 13.23 per cent.
Performance of indices in 2020
Source: FE Analytics
“With value having underperformed growth ever since the global financial crisis and, particularly over the last year, a historically large valuation gap has opened up between the styles,” said the manager. “The US market has been the most significant beneficiary of this, but we see this changing.”
The sheer size of the fiscal stimulus packages in the US also give the MPS team cause to believe the power of the US dollar may start to wane.
“The dollar’s period of strength is also unlikely to continue, primarily because the Federal Reserve has been more aggressive than other central banks in currency printing,” said Burns.
“Our move against the US reflects these drivers, meaning there are more attractive opportunities elsewhere.”
As such, the team has added to existing UK holdings such as Man GLG Undervalued Assets, which is run by FE fundinfo Alpha Managers, Henry Dixon and Jack Barrat.
Elsewhere, Burns explained that the team has also become pretty positive on Asia and emerging markets in the last couple of months and are currently running overweight positions.
“It’s an area that our strategy team has become increasingly positive on and a weaker dollar will only strengthen that,” said Burns.
Nevertheless, it has been reducing its exposure to China, as the team decreased its position in Fidelity China Special Situations following a very strong period of performance in 2020.
Performance of trust vs sector & benchmark in 2020
Source: FE Analytics
Over the course of 2020, the Fidelity China Special Situations fund posted a total return of 68.59 per cent, compared with a 27.86 per cent gain for the IT Country Specialist: Asia Pacific ex Japan sector and 25.50 per cent for the MSCI China index.
Indeed, Burns was quick to note that reduction in exposure was not an indicator of its lack of faith in China, with the investment trust remaining a core holding.
“It will be in the portfolio for a long time,” said Burns. “In fact, our allocation to Chinese equities is only going to go up in the coming years.”