Smith & Williamson Investment Management adds BlackRock Gold & General to MPS range to prepare for return of inflation

Smith & Williamson Investment Management’s Managed Portfolio Service (MPS) has added a position to BlackRock’s Gold and General fund in anticipation of resurgent inflation over the next few years.

Inflation was effectively off the table for much of 2020 as the impact of the pandemic – and the subsequent lockdowns across the globe – saw many drivers of inflation go into reverse.

It dipped in the UK once more in November, with CPI inflation dropping to 0.3%, but James Burns, co-manager of Smith & Williamson Investment Management’s MPS, said the outlook had shifted as we begin 2021.

The team has therefore added the BlackRock Gold & General fund across the portfolios in the MPS range, with gold an asset that is likely to benefit from rising inflation, as well as providing diversification.

“BlackRock Gold & General has been introduced across the range and plays to our medium-term view that increased inflation is likely, which should benefit the gold price,” Burns said.

“The key driver of this view is the outsized impact of policy, particularly the deployment of fiscal measures on top of the monetary stimulus that has been repeatedly used over the last decade.

“We believe tail-risks of significant inflation may also be tilted to the upside, with the risk that policymakers are potentially building up more significant challenges in the longer-term and that the reaction function of central banks and governments might well be too slow.”

The team believe gold and precious metal securities, while carrying some beta, should also provide some protection in challenging markets.

“While inflation was a consideration, gold is also a means of diversifying returns in this environment,” Burns said.

Elsewhere, the team has increased the allocation to the UK equity market at the expense of the US, in the view that much of the UK market is undervalued.

“We have taken the opportunity to move overweight the UK and underweight North America, and this is something we did in early December,” Burns said.

“This is driven by what we believed to be excess pessimism towards the UK at a time when Brexit would soon be done one way or the other, mass vaccine roll-outs were on the horizon, and the UK simply looked too cheap relative to virtually all other markets. The prospects for the pound also looked more positive.

“On the flip side, with value having underperformed growth ever since the Global Financial Crisis (GFC) and particularly over the last year, a historically large valuation gap has opened up between the styles. The US market has been the most significant beneficiary of this, but we see this changing.

“The dollar’s period of strength is also unlikely to continue (it has already been weaker in the second half of 2020), primarily because the Federal Reserve has been more aggressive than other central banks in currency printing. Our move against the US is a reflection of these drivers, meaning there are more attractive opportunities elsewhere, although we don’t expect the US to fall off a cliff.”

As well as adding to precious metals and the UK, the MPS portfolios have also been reducing exposure to specific equity markets, notably China where the team decreased its holding in Fidelity China Special Situations fund after a very strong period of performance in 2020.