Franklin Templeton portfolio expert on the importance of leaning your asset allocation away from risk
It may not be the height of fashion but K2 Advisors' “We don’t time, we tilt” staff t-shirt is a clear indicator of its investment philosophy.
Brooks Ritchey, senior managing director and head of portfolio construction for Franklin Templeton's K2 Advisors, told WP that most retail investors are alive to this approach and are more intelligent about asset allocation than general consensus gives them credit for.
He believes retail is embracing hedging strategies and alt funds as we enter late cycle and a potentially lower-return environment. Ritchey said Franklin Templeton’s offshore structured funds started with $100 million and have grown to $2.5 billion, while the US versions also started at $100 million and have advanced to $1.2 billion.
He added he’s seen a nice adoption from investors in continental Europe and good recent inflows on the US mutual fund version.
“I think people in the US, their equity market was doing fine until February, they’re late cycle and they are now just realising that maybe rather than equities, they should take some profits or diversify away.
“As a retail investor myself, the key is if you’ve made any money in the past 10 years and if you believe what you’re broker strategist is telling you, then maybe you need to be conservative for a year and a half.
“And if interest rates go up in the next year and half or two years, I will be the first one to tell you look you should rotate out of alternatives and back into fixed income, or if the equity market is correct enough, equities.”
Emerging markets might be a fantastic allocation option in 18 months, he said, but warned that retail investors who think they can time the markets will be in for a rude awakening. Tilting, however, can help preserve capital.
He said: “We believe as everyone else does, that you can’t time the market but you can tilt your portfolio away from what might be risky. We have a t-shirt quote here, ‘We don’t time, we tilt’, because if you can just tilt away from a heavy bond market then you’re going to have a clearer head.
“Then you’re going to conserve capital and be ready to re-allocate in a year and a half to, let’s say, a 3.50%, 3.20% Canada 10-year or something that’s generating a little yield.
“Retail is not trying so much to figure out how to time to market but how they can tilt away from some of the risks and conserve capital that way.”
Ritchey explained that alternative strategies and most hedge strategies are a very efficient diversifier against your bond holdings because they have a negative beta sensitivity to it as yields go up and bond prices go down.
He believes investors, therefore, get a “double positive” if they are worried about their bond holdings. “It’s a diversifier from equities but an offset to bonds,” Ritchey said.
