In markets like these, humility matters. When geopolitics can shift overnight, the role of a multi-asset manager is not to predict the future with certainty, but to build portfolios that can withstand a range of outcomes.
The recent escalation in Iran is a case in point. It is tempting to react quickly, to reposition aggressively, or to chase short-term opportunities. But as many experienced managers will attest, periods like this often reward discipline over activity.
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Across the industry, the message has been consistent: stay balanced, stay diversified, and act selectively. A number of the managers we’ve spoken to in the past few weeks have all emphasised caution, while still identifying opportunities at the margins.
Across the VT Chelsea Managed Funds range, we have taken a more defensive stance in the near term.
Raising liquidity in an uncertain world
As tensions escalated, we increased liquidity across the VT Chelsea Managed Funds range, taking cash levels well above our long-term averages.
Within our Aggressive Growth and Monthly Income portfolios, cash is currently around 6%, rising to nearly 12% in our Cautious Growth strategy. This is a deliberate decision. While holding elevated cash levels may create a drag if markets rally sharply, it also provides optionality and, importantly, downside protection.
Darius McDermott, managing director of Chelsea says: “I’d rather miss two days of a bouncing market than not defend if things get a lot worse.”
This reflects a core principle of our approach: capital preservation matters, particularly when risks are difficult to quantify.
Trimming equities, not abandoning them
To fund this increase in liquidity, we have reduced equity exposure modestly across the range. This is not a wholesale de-risking, nor a call on the long-term prospects for equities. Rather, it is a recognition that near-term volatility is likely to remain elevated.
Encouragingly, many of the managers we talk to are taking a similarly measured approach. Rupert Silver, head of fixed income at Credo Capital, for example, argues that in highly volatile markets “sometimes the best thing to do is nothing,” highlighting the dangers of overtrading in response to headlines.
At the same time, we are mindful that dislocations can create opportunities. Equity markets have already shown a tendency to move sharply on sentiment, often without clear differentiation between winners and losers. That creates scope to improve diversification and selectively add to areas where valuations become compelling.
Structural themes remain intact
Despite the near-term uncertainty, several longer-term themes continue to underpin portfolio construction.
Defence is one such area. Increased geopolitical tension and shifting alliances are likely to drive sustained increases in global military spending. One of the changes we made in 2024 to counteract growing geopolitical uncertainty was the purchase of the Future of Defence ETF in our portfolios – this offers investors exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending.
Energy is another. Recent research from Rathbones highlights that recent events have challenged assumptions around the decline of traditional energy assets. Oil and gas companies have once again demonstrated their value as portfolio diversifiers, particularly in inflationary environments.
We have been raising our oil exposure through the iShares MSCI World Energy ETF across our funds, but at the same time, we continue to see a role for renewables and infrastructure, and also bought more renewables. They should be beneficiaries of higher energy prices and already had yields of 10-12%.
Preparing for multiple outcomes
If there is one consistent message from the managers we speak to, it is that the range of potential outcomes remains unusually wide.
Markets are attempting to price a highly uncertain geopolitical situation, often reacting quickly and sometimes indiscriminately. This can lead to oversimplification and exaggerated moves, creating both risks and opportunities.
For us, the response is clear: maintain diversification, preserve flexibility and avoid overcommitment to any single scenario.
Holding higher levels of cash is part of that strategy. So too is maintaining exposure to a broad range of assets and investment styles. While we have become more cautious, we are not standing still. We continue to look for ways to enhance diversification and position portfolios for the medium term.
Taking a disciplined approach
Periods like this can be uncomfortable. They test conviction and challenge established frameworks. But they also reinforce the importance of a disciplined, repeatable investment process.
We are not trying to predict the precise outcome of geopolitical events. Instead, we are focused on ensuring that the VT Chelsea Managed Funds range is resilient. That balance is not always easy to achieve. It may mean underperforming in short bursts of market optimism. But over time, we believe it is the most effective way to navigate environments like this.
That said, it is important to recognise that our Aggressive Growth strategy is, by design, positioned to take on a higher level of equity risk, meaning it will typically experience greater volatility in both directions, especially during sharp market drawdowns.
