Salt Funds Management has eased its foot off the accelerator coming into the final curve of 2024 as valuation extremes and geopolitical risks signal potential hazards ahead.
According to the Salt quarterly global outlook report published last week, the “the prudent course into year-end is to trim back some portfolio risk” in diversified funds.
While investors have been “well-rewarded” for risk-taking over 2024 amid volatility, Salt says markets have fully priced-in the future impact of any interest rate cuts.
“Until fresh catalysts emerge for an additional, sustained upward move in global shares, we are trimming our global exposure while reducing the size of our underweighting to NZ shares, in our Sustainable Growth Fund,” the outlook says. “In our Sustainable Income Fund, we continue to diversify via superior yield sources into the global bond markets and are in the process of moving from neutral, to a small overweight position in global fixed income securities.”
But Salt head of global diversified funds, Greg Fleming, said the manager is only making minor asset allocation adjustments for now.
“We’re not expected a severe bear market,” Fleming said, noting positive earnings outlooks and strong returns to date.
However, he said stock valuations are nearing “extremes” while investors remain overly sanguine about numerous geopolitical risks that may come to a head over the next three months.
“… we think market pricing already largely reflects the most benign near-term economic and political scenarios,” the Salt report says.
“Other possibilities exist, and a potentially-contested US Presidential election next month, fought against the backdrop of a deteriorating international security situation, means that we are comfortable with moving our broad International Equities positioning in the Growth fund for the first time into a small Underweight tilt.
“This remains counterbalanced by overweight positions in interest rate-sensitive and generally cashflow-predictable infrastructure and listed property holdings in that Fund.”
In proportional terms, Salt has moved the growth fund exposure to global equities from +1 per cent to -1 per cent relative to benchmark while adjusting the NZ shares underweight from -6.5 per cent to -5 per cent.
“We’re edging slowly to a less-concerned view of NZ equities,” Fleming said, noting aggressive official cash rate cuts could spur a local share market particularly sensitive to interest rates.
Over the 12 months to September 30, the Salt growth fund was up more than 20 per cent while its income diversified strategy rose almost 16 per cent.
The two Salt funds, that use Morgan Stanley and Cohen & Steers for global assets, have benefited from an overweight to listed property and infrastructure, the outlook says.
“Real assets have, as we anticipated, responded very strongly to the better macro path and have rallied from quite advantageous valuation levels to log one-year gains around +30% – with our Infrastructure Fund gaining +32% (gross) in the year to 30th September and our Global Property Fund up by +29% (gross),” Salt says.
Fleming said the manager would reassess diversified fund risk settings again in January – the other side of the US elections hairpin bend.