‘Investment opportunities thin on the ground’ says private client manager
Becket added: “Trying to find good investments in a world of bad value is difficult. Our portfolio has become more concentrated. Rather than having 30 individual positions, we have just 24 on our balanced portfolio.”
This is not a reflection of the economic environment, which Becket believes remains relatively strong. He said: “Global economic growth is neither going to be very strong, nor very weak. Our view is it will be ‘dull not disastrous’. However, valuations are stretched, particularly in markets such as the US.” He says he is guiding clients to expect lower returns than in recent years and more volatility.
“We are more cautious than we have been for some time. At the start of the year, we expected low but positive returns. If we can hold onto the gains we made in the first half of the year in the second half, we will be in a good place.”
In practice, this means that the group’s portfolios are positioned with a more ‘defensive’ tilt than they have been. This means keeping away from the most expensive parts of financial markets. This includes US equities, where valuations are high, but also high yield bonds, which have little value, says Becket. The only bonds they hold have a shorter maturity and therefore less sensitivity to interest rates.
Unusually, this also includes an allocation to emerging markets. Becket says: “Emerging markets are starting to contribute more to global economic growth. Central banks are doing well and emerging markets assets are valued more attractively.”
Japan is another favoured area. Becket believes that Japanese stock markets are ‘outstandingly cheap’, yet widely disliked by international investors, leaving valuations looking appealing. The group holds the RWC Nissay Japan Focus fund, which invests in companies that are improving their corporate governance and shareholder returns.
The group is also taking a larger position in absolute return funds, which aim to deliver a positive return in all market conditions. Becket said he is not a fan of the sector in general, believing that it has generally delivered weak returns for investors, but he likes the Jupiter Absolute Return fund run by James Clunie. The Psigma portfolios also hold a number of thematic funds, such as RobecoSAM Smart Materials fund, which invests in innovative materials and disruptive technologies.
Becket believes that active managers (managers that aim to pick the right stocks and sectors) may fare better in this environment, after a period when they have performed worse than passive funds (funds that simply aim to replicate an index). In theory, active managers should be able to move the right stocks and sectors if financial markets turn downwards.
Becket concludes that markets are moving ahead of themselves, and may be getting to a euphoric state. He says it is time to pare back risk and not be ‘too aggressive or greedy’.