Investment Conundrums: Seneca's Peter Elston On Avoiding 'fund Blow-ups'

The chief investment officer and his colleagues at Seneca IM have been reducing risk across clients' portfolios since 2017, at a time when Elston said there were "no visible signs whatsoever" of a downturn. 

While he bore the brunt of "quite a lot of stick" when he first started positioning defensively, Elston has continued to increase cash and alternative weightings at the expense of equities, and told Investment Week he now feels "less lonely" in his less-than-bullish macro views.

"When you are driving and you get to a bend, when do you break? You do so as you approach it. To be particularly conservative, you should probably start breaking at what may seem a little early, because that is sensible if the bend turns out to be closer than you thought. 

"Then if it is further away, you are still on the road. The key with investing is to stay on the road. Going off the road is an analogy for the fund blowing up, which of course nobody wants," he said.

'Hard times ahead for investors': Buyers start to de-risk portfolios as macro backdrop deteriorates

Elston first began encouraging the team to position defensively when developed market unemployment rates started stooping towards extremely low levels, which therefore suggested labour markets were tightening and wages were accelerating. Elston said this chain of events naturally leads to higher inflation. 

"Higher inflation means central banks will want to end the party and pull the punch bowl away. That either happens through central banks ending their quantitative easing programmes, which is what has already happened, or through increasing interest rates, which will be the next step," he explained. 

"As the economy suffered during the throes of the Global Financial Crisis, interest rates were all slapped to zero and as they could not move lower central banks had to introduce QE. And, when the reverse happens, it occurs in the opposite order. 

Preparing to bunker down or full steam ahead? Part II

"First of all, central banks end their QE programmes, then they are in a position to start raising rates. That has become most notable in the US where they ended their QE programme two or three years ago.

"That was the point at which they started to increase interest rates. Since then, they have increased from close to zero to around 2.25% to 2.5%. 

"Because you have not had interest rate increases in other countries, investors assume monetary policy has not been tightened either. 

"Actually, that is not true. The end of QE programmes is a significant factor in tightening policy; the introduction of QE is a loosening of policy, therefore removing it is the opposite.

"I think people are unaware of just how much monetary policy has been tightened as a result of the end of QE programmes."