In part two of this Green Dream video interview, Will McIntosh-Whyte, fund manager of the Rathbone Greenbank multi-asset portfolios, and Rahab Paracha, sustainable multi-asset specialist, discuss defensive fund positioning, appetite for green bonds and searching for “genuinely uncorrelated returns” in the alternatives space.
Watch the full video interview above and read the transcript below.
NK: Welcome back to this Green Dream video series. I’m here with Rathbone Greenbank’s multi-asset team Will and Rahab. Thanks so much for taking the time to speak to me again. I wanted to ask about asset allocation on the multi-asset portfolios, how that looks, where are you favouring, and where are you more cautious?
WMW: So we went into last year, which seems a long time ago now, with reasonable amounts of cash, very short durations in terms of the bonds, keeping the maturities very, very short. When we looked at yields on offer, they were very, very low, and actually we felt, in particular, things like government bonds were really more of a source of risk than the risk-off role that they used to play.
And as the year has progressed, yields have risen quite substantially and so we spent a lot of last year building up those parts of the portfolios buying government bonds. In the UK that’s gilts, we don’t buy US Treasuries as they don’t meet our sustainability criteria, but instead we buy US dollar-denominated supranational bonds. So focusing in that space as well and we built that part of the portfolio up because a) you’re getting paid for it now, you’re getting much more attractive yields on offer. And b) we think from here it’s going to make a return as that sort of risk-off buffer in portfolios, having that negative correlation with equities. Actually, we think at these levels it is a much more attractive place for multi-asset investors to go.
Looking at the other side of bonds, which is credit, there are some really interesting opportunities to add credits through last year as yields were higher and spreads blew out as well. So we took advantage of that but have taken that back a little bit now. We’re just letting that drift down. But I do think there might be more opportunities to add as the year goes by.
And then on the equity front, we were relatively defensive. We’re trying to make sure we don’t shut down risk and we can capture some of the upside if markets continue to rally. But we are wary that rates are quite high. Markets and economies are slowing. So keeping a relatively defensive element on our equity side.
NK: On the green bond side, where have there been interesting positions, and where would you like to see more issuance?
RP: Over the past five-to-seven years in particular, we’ve really seen the green bond market develop. We’re seeing a lot more investment grade green bonds coming into the market now as well. In terms of what was important for us, I think it’s really just about more issuance because the bigger the green bond issuance gets, the lower the premiums on green bonds, and the better able we are to express our investment views through the green bonds that we do choose.
Right now, we are favouring green bonds and sustainable bonds issued by supra nationals. But in terms of what I’d like to see more of, I would say sterling-denominated green bonds, because despite commitments that area is still slightly lagging, particularly compared to Europe and even the US.
And then aside from that, I think it’s just about choice for us. So just more green bonds and credit ratings across maturities, again, this will really allow us to find a green bond that fits in with our portfolios’ needs as best as it can.
NK: Great, we’ll see how that pans out. What about alternatives? How do you use those within portfolios?
WMW: In our portfolios, we like to talk about diversifiers and there is a bit of a difference there in that, for us, when we’re building up that part of the portfolio, we’re thinking about having assets that can provide genuinely uncorrelated returns or help hedge risks. And I think the danger with some of the alternative investments is people are looking to those to provide them with diversification and, actually, when you get stressed markets, whether that’s rates rising or equities selling off, these things contend to correlate with your equities, and they therefore don’t provide you with that diversification that you want just at the time that you want it.
So when we’re looking to populate the diversifiers part of the portfolio, we’re looking for assets that can provide genuinely uncorrelated returns or help hedge portfolios in those stressed periods. So that might include things like put options, which we’ve used on and off since launch of the funds, trying to make sure we’ve got something we can rely on to provide some protection if equity markets take a turn downwards.
And also then trying to think slightly differently. At the back end of 2021, we were a bit worried about rates going up and what that might do to portfolios, particularly given the growth bias that’s inherent in sustainable investments. We looked at a bond volatility product, this essentially benefits if we saw an increase in volatility in bond yields. And, of course, with rates having been so low for some time, we were able to accept this at a sensible level for sensible price. And as the Fed tightened more aggressively through last year and bond yields spiked higher, this actually performed quite well and was one of the few things that was able to really protect portfolios in a period where most things were selling off.
NK: That’s really interesting. Well, thank you both, we have a real flavour of the portfolios now, thank you very much for your time and sharing that with us.