Mining and Macau: the investments attracting the professionals
The twin events of the Brexit vote and Donald Trump win unnerved investors in 2016. This year, uncertainty and volatility look set to continue.
For DIY investors looking to add to their portfolios in 2017, deciding where to allocate cash may feel a daunting task.
Here, three professional investors, who can all invest across various asset classes, reveal where they’re seeing opportunities and how they’re tapping into the action.
Equities – ‘better risk reward than bonds, property or cash’
Despite the shock results of the Brexit vote, US presidential campaign and Italian referendum, equities have had a fairly strong run since July last year.
But Rob Burdett, co-head of the F&C multi-manager range, believes equities have further to go.
“Overall, I still think equities offer better risk rewards than bonds, property or cash, in that order,” he says.
“To some extent, there are very few private investors in this bull market, only those who have had advice or are permanent in the industry participate.
“Normally the market peaks when people who don’t ordinarily invest get involved to make money. We are not seeing that yet and I think equities can and will carry on rising.”
One potential headwind for equities this year is the upcoming European elections. Burdett gives the example of Marine Le Pen, president of France’s far-right National Front party, winning the country’s election. This, he says, would be seen as a bad thing by the majority of people and may well have a negative reaction in the market. But at the same time, it could throw up opportunities.
Burdett says even if the elections go the “wrong way”, it’s unlikely the world will fall into recession.
“Despite where the markets are, we are reasonably comfortable over equities. They’re not cheap but not at the hiatus that we saw at the peak of the market before it collapsed in 2008,” he says.
Within the F&C MM Navigator Distribution fund, Burdett has 58% equity exposure. Specifically, he’s been adding to global value funds, income producing funds as well as gaining exposure to Japan and Asia via the Schroder Asian Income Maximiser fund, Artemis Global Income fund and JPM Emerging Markets Income fund.
On the negative, Burdett lists bonds, specifically government bonds and investment grade corporate bonds. Instead he prefers niche fixed income and alternative income areas like student accommodation which provides “solid, regular income which is not sensitive to the economy”.
“If we were to go into recession in the next 12 months, it would be bad for equities, not great for government finances but the student population would increase. There would be fewer jobs for school leavers so they’re more likely to go to university and for graduates, they’d consider a post-graduate course.
“Student yield is in excess of inflation and cash – it easily beats inflation even though it’s rising. It beats cash just on the dividend on portfolio shares and we expect it to rise 5-10% this year.”
Emerging market debt – via tracker funds
John Husselbee, head of multi-asset at Liontrust Asset Management, has recently increased emerging market debt holdings as the sector dipped on the back of Trump’s surprise victory.
“We’ve done this very simply via tracker funds for now as we have yet to find active managers in the emerging market debt space who we believe add sufficient value,” he says.
He has maintained a long-term underweight position in bonds because “it’s important to have an allocation to the asset class in a balanced portfolio”.
“That said, given dwindling yields, investors looking for income clearly need to look further afield for low-volatility income. Options here include real estate, long/short equity strategies and strategic bond funds.
“In our portfolios, we have balanced out the underweight bond position with various alternative holdings, split between absolute return funds, to reduce risk, and hedge funds, to enhance returns.”
Husselbee says he’s recently added two holdings and removed two.
“We’ve added TM Fulcrum Diversified Core Absolute Return, where we like the large team headed up by former Goldman’s economist Gavyn Davies, and Jupiter Absolute Return as, while most of our other holdings in this area are run by large teams, this is a play on the skills and track record of manager James Clunie,” he says.
In terms of sells, Husselbee says he’s removed a UK-focused absolute return fund, preferring “more global offerings as anti-globalisation feelings continue”.
“We have also sold a currency portfolio in light of sterling’s post-Brexit performance,” he adds.
Mining and the Macanese residential market
Nick Greenwood, manager of the CF Miton Worldwide Opportunities fund, has added a number of holdings to his portfolio.
One is Baker Steel Resources investment trust, which invests in global natural resources companies, and falls within the commodities sector.
Greenwood says generally investors only look 18 months forward, but this sector, particularly mining, is due to have its potential recognised this year, appealing to investors with a shorter-term horizon.
He says: “A very interesting project is a silver deposit mine in Russia – probably one of the biggest mines in the world – if it’s developed. It interests us as markets and investors aren’t interested in the long-term horizon but as we get closer to the action – 18 months – there could be a J curve effect and people will start looking at it. The potential gains aren’t that far in time.”
The second area that interests Greenwood is the Macanese residential market via investment trust Macau Property Opportunities (MPO) – listed and traded in the UK – due to the casino and gambling opportunities in the former Portuguese colony.
“The culture of gambling was seen as a corrupt den to spend your ill-gotten gains and it suffered over the last two years because of the anti-corruption drive so you didn’t want to go anywhere near it.
“In the longer-term, there have been two big changes. A lot of US companies built new casinos, which follow the Las Vegas model, but in Macau, it’s bigger than Las Vegas as it’s more about entertainment and not so much about the gambling part. The profitability is therefore way higher.
“Four casinos have already opened and visitor numbers are going up sharply. Macau has a working population of 360,000 but 40,000 staff are needed so there’s upward pressure to build properties.”
Greenwood says this area has slipped the attention of UK investors and is currently trading at an “enormous discount”.