Quarterly Review Q1 2024 - Adventurous final - Flipbook - Page 6
Central Bank Rate decisions and market focus
Markets have become intently focused on when central
banks will begin to lower interest rates and the pace at
which they will do so. Predicting these movements is
notoriously challenging, yet it appears unlikely that we
will see a return to 0% interest rates in the near future.
Even with declining rates, heavily indebted companies
will struggle to issue debt, and when they do, the
cost of credit will be substantially higher. As a result,
the strength of a company’s balance sheet will play a
more critical role moving forward, steering us towards a
preference for active management.
Opportunities in smaller companies
Smaller companies have been neglected for an extended
period and have underperformed their larger-cap peers
worldwide by a considerable margin, a trend that
persisted in the 昀椀rst quarter. We believe this has created
some outstanding value and growth opportunities
within this market segment. However, given the evershifting landscape, we are acquiring this exposure
cautiously and through managers who prioritise balance
sheet strength. In a 昀椀nancial context where debt is less
accessible and more expensive, well considered active
stock selection will become increasingly vital.
Fixed income and high-yield corporate bonds
This principle applies equally to 昀椀xed income. The
more arduous re昀椀nancing climate is one reason for
our heightened caution regarding high-yield corporate
bonds. These bonds, typically issued by lower-quality
companies carrying more debt, are more vulnerable to
economic 昀氀uctuations. We contend that the modest yield
premium over higher-quality debt does not adequately
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re昀氀ect these risks. Consequently, in portfolios with a
昀椀xed income component, we prefer maintaining a core
investment in a global government bond-focused ETF,
along with selective allocations in asset classes with
high return potential.
Japanese Equities: A structural opportunity
Regarding equities, we maintain a positive outlook
on the opportunities in Japan. Our overweight stance
on Japanese equities, sustained for nearly four years,
is driven by attractive valuations and structural
reforms aimed at enhancing corporate ef昀椀ciency and
shareholder returns. Our engagement with the Fund’s
three incumbent active Japanese equity managers has
revealed tangible signs of these reforms, manifested
in improved earnings growth and dividend increases.
This approach was validated once again this quarter,
with MSCI Japan outperforming many global indices,
including the prominent U.S. market, underscoring the
bene昀椀ts of international diversi昀椀cation in your fund.
We believe this structural opportunity has considerable
potential for further growth.
UK Equities and Government initiatives
We also continue to favour UK equities. The recent
announcement by the UK Chancellor of a new British
ISA, offering an additional £5,000 tax-free allowance for
investment in UK equities or funds, is unlikely to have
a signi昀椀cant monetary impact. However, it signals a
broader initiative to encourage greater investment in
UK businesses by both domestic retail and institutional
investors.