Portfolio update: quality first

The next few weeks, when the earnings season will be over in the US, and many dividends will be received in Europe, are critical for the confirmation of current trends in the markets on both sides of the Atlantic ocean. As the S&P 500 index has almost reached a new all-time height and many investors rely on the initiative of the central banks for keeping the trend alive, we renew our barbell approach for risk, biased on the safe side.


For fully reporting the composition of risk we refer to the net exposure in each asset class, which means that for every "long" holding we mention the relative hedge and therefore the net exposure. Overall the net exposure in equities is rather low for since few days, tactically negative in specific markets (S&P500 and Italian BTP).


Quality (both bonds and equity)

The top-down selection starts with the top-ranked names in the ESG universe (Environmental, Social and Governance). We believe that toward the end of the economic cycle as we are, transparency on these three categories is a significant plus.

Setting aside per a moment the competitive analysis of the single corporations and the capacity to innovate, we prefer large caps as their securities are expected to be liquid under any circumstance. As for the financials, we need to see on positive operating cash flows (unless a specific investment plan is in a place like in the satellite industry), positive operating CF growth in the last 12 months, adequate levels of debt and, of course, valuation vs peers.

We are tactically net short S&P500 while Net European equities are 13%. Total net equity beta adjusted is 9%.


Investment grade and government bonds

14.2% of the portfolio is in IG corporate bonds, mainly in USD. Among IGs we favour higher grades like Heineken, Pepsi and Comcast. 9.5% has been recently invested in 10 years US Treasuries after the recent downturn symmetric the US equity rally. Lastly, we carry a substantial short position in Italian BTP (14.6%) as we think that over the next two years, the current position of Italian accounts is unsustainable. We agree that for now, this position is a drag for the performance.


High Yield (HY)

The average historic/long term yield of HYs is 7/8%. Today the yield to maturity of this bonds sits well south 3/4%. We usually like to invest in these type of securities when a "fallen angel" see its chances of re-financing substantially increased by a precise corporate event. Alternatively, when there is a clear uptrend in the market to follow.


We recently decreased further (to 11.8%) high yield bonds. Notwithstanding we keep liking our selection we are aware that the spreads look extremely stretched, and a further favourable shift in the yield curve is unlikely. The sale of one of our top pick in the HY universe, Bombardier, is a clear example of how a downward revision of the guidance news and limited liquidity are not portfolio's best friends.


Currencies

Foreign currencies thickens substantially the tails of the risk distribution. Over the years cases of sudden increase in volatility in the currencies kingdom are countless. For this reason our portfolio is denominated in Euro and mostly exposed in Euro, the reference currency of our investors. We invest tactically in three other currencies: CHF, USD and GBP. At present, the GBP is short 6%. (Net position in USD is 6% and CHF has a similar proportion. The first is a more stable long term position while we invest in Swiss francs purely on a tactical basis).


Cash

Lastly, we have a substantial part of the portfolio (35%) invested in cash (not on current account due to negative interest rates). We expect to be able to reinvest it gradually and more appropriately around the next 8/10 weeks. Additionally, we have a marginal position on gold (5%). We are not increasing this position for the moment as we think that the main drivers for performance have faded away.


This is, overall, the structure of our portfolio. We are relying more on dividends and coupon from high-quality names than the identification of trends in the market. Enquiries on the details are welcome as usual. Feel free to drop us an email, and we will contact you for a meeting or a video call.


Best regards


Federico Polese


Simplify is an AIF umbrella fund, is authorised by CSSF in Luxembourg and passported in Italy and Sweden. The fund is managed in London.