Last week Laurium Capital made a notable asset allocation switch in its balanced strategy. It moved around 5% of the portfolio out of the S&P 500 and into the Russell 1000 Value Index
Brian Thomas, co-portfolio manager of the Amplify SCI Balanced fund, told Citywire that there are two reasons for the move. The first is that the firm sees this a way to hedge its S&P 500 exposure. The second is that it sees ‘clear return potential’ in this part of the market.
Since the launch of its balanced strategy, Laurium Capital has always used index products for its offshore equity exposure. This, it believes, is the most efficient way for it to access international markets.
Predominantly, this has been through products linked to the S&P 500 in the US, and MSCI Europe.
‘Our view is that instead of spending time trying to decide which manager to use, which is not a speciality of ours, to rather go for the index and spend our time thinking about asset allocation and which index we are should be using,’ said Thomas. ‘We are always scratching around, asking if we are in the index that is going to offer the optimal return.’
Over the last few years, having a large exposure to the S&P 500 has been highly beneficial as the US market has performed strongly. Even so, Laurium has been conscious of the need for risk management.
‘Up until about three months ago, we ran a hedge against our S&P 500 position,’ said Thomas. ‘We bought basically 95% puts on the index. Those paid off during the crisis, but not as handsomely as we would have liked.
‘Then, considering how we were positioned post-crisis, we were confronted with the decision of whether we should increase put protection on the S&P 500. We decided that, given the volatility at the time, that it wasn’t worth going with a put protection strategy at this stage in the cycle.’
However, the massive dislocation that had emerged between growth and value, both in terms of ratings multiples and performance, gave Laurium another option.
‘In the US, taking some exposure off the table in the S&P 500 and putting it in a value index is in some ways a hedge against what has really driven the growth of the S&P 500,’ said Thomas.
‘Additionally, we clearly see return potential out of the value component of the market. One always has to guard against recency bias. The stocks that have performed particularly well have been the growth stocks, and they’ve carved out phenomenal businesses. But just because they have, for the last few years, been the best-performing stocks in the market doesn’t mean that is always going to be the case.
‘We do believe that at some point in time there is mean reversion that takes place.’
Thomas said that this is not the first time that Laurium has considered this trade, but finds it more compelling now than it has been in the recent past.
‘The very big performance delta and the very big valuation delta between growth and value indices has just continued to grow and grow over time,’ he said. ‘We have looked at it numerous times, but now we thought that disparity is just too wide for the reality of what’s going on in those markets.
‘We have a view that the recovery coming out of the US is going to be reasonably strong,’ he added. ‘That recovery will probably benefit some of the beaten-up value sectors more than some of the growth sectors that have done fine already.’
Watching the market
Although Laurium does not have a position on individual international counters, Thomas does agree that the upside to the big five US tech companies – Microsoft, Amazon, Apple, Alphabet and Facebook – does feel limited.
‘We don’t run detailed models on those,’ he said. ‘We don’t believe we have an edge. But just one of the feelings you have is that the law or large numbers starts to work against those companies.
‘The Covid environment has been very good for the tech stocks. Everything has gone online. But it just shows how dominant those businesses have been. As we return to normality, I think the pendulum does swing a bit away from them. They are great businesses with strong balance sheets, but diversifying away from them makes sense.’
‘I wouldn’t want to over-emphasise it,’ Thomas added. ‘It’s a tweak in the asset allocation into a place we are finding interesting at the moment. But we haven’t completely turned the ship around.
‘We haven’t sold everything we had in the S&P 500. We still have 10% of the portfolio in the S&P 500 and now 5% in the Russell Value Index. We are going to watch it and might add to value trade as we observe market conditions changing.’