2016 has seen its fair share of shocks
With Donald Trump winning the US election and the UK voting to leave the EU, is it time to take a look at multi-asset strategies? Certainly managers from the Flexible Investment sector think so, particularly in the context of political shocks, faltering monetary support and significant inflationary pressures. The question for these managers is what asset classes offer protection?
Earlier this week the Association of Investment Companies (AIC) hosted a media roundtable with Peter Spiller and Alastair Laing, Co-managers of Capital Gearing Trust and Hamish Baillie, Co-manager of Ruffer Investment Company. Both managers see the threat of inflation as the biggest risk to equity portfolios – something that is strongly influencing their investment strategies.
The AIC has collated their comments, together with those of Peter Webster, Assistant Fund Manager at Henderson Global Investors who works alongside Ian Barrass and James de Bunsen, Henderson Alternative Strategies Trust and David Zalaznick, Manager of JZ Capital Partners.
A new US President
Hamish Baillie, Co-manager of Ruffer Investment Company said: “Post-US election, it’s unlikely that we will increase exposure [to fixed interest and gold]. Trump’s economics are pretty reflationary; which short-term will be negative for long duration assets but positive for some cyclical plays. Longer term this will increase inflation and see real yields fall, which is good for index-linked bonds.” Indeed Baillie explains that long dated index-linked gilts in Ruffer’s portfolio make up 12% of the total and have performed very strongly this year (+55%).
Inflation the biggest risk to investors’ capital
Capital Gearing Trust has some 62% of its assets in fixed interest (just 24% in general equities). Peter Spiller, Chief Executive and Co-manager of Capital Gearing Trust (a company he has managed for 35 years) said: “Unconventional monetary policy has depressed yields on safe assets, forcing investors to take more risk in order to generate their desired returns. This process has increased all asset prices to levels that have, historically, been associated with very poor medium term returns. Unconventional policy has also increased the risk of elevated inflation, which is amongst the greatest medium term risks to investors’ capital. In the short term the main goal of asset allocation should be to preserve capital after tax, fees and inflation and to wait until better opportunities present themselves. The time to take additional investment risk is when asset prices are low and fundamental values attractive, the opposite of the situation that prevails today.”
Hamish Baillie, Co-manager of Ruffer Investment Company said: “The greatest risk that Ruffer sees to savers’ capital is a return of inflation. Central banks and governments regard a little inflation as a desirable, and relatively painless, way to reduce debt burdens since it reduces the real value of borrowings over time, but as long as interest rates remain at (or close to) zero then savers are being robbed to fund this bailout. The hangover of the pre-crisis debt binge remains unresolved and the very existence of this debt overhang will prevent central banks from being able to counter rising inflation with higher interest rates. This is a painful scenario for savers and represents a generational event in terms of wealth redistribution, but it is a desirable outcome for central banks and governments as it avoids the socially toxic scenario of widespread defaults.
“The question therefore becomes one of how we reach this denouement and what asset classes will offer protection. We feel that very few people are addressing this issue which means that there are still opportunities available.”
Peter Webster, Assistant Fund Manager at Henderson Global Investors who works alongside Ian Barrass and James de Bunsen, Henderson Alternative Strategies Trust said: “World equity markets have failed to rise above mid-2015 levels in local currency terms and developed market government bond yields have been moving higher since June 2016, meaning prices have fallen. With the US Federal Reserve having stepped away from monetary easing and both the European Central Bank and Bank of Japan running out of assets to buy it appears monetary policy may have reached its limits. As government bond yields have collapsed investors have sought returns from equities, driving up their valuations despite anaemic world growth since the financial crisis. With both equity and bond markets trading expensively, monetary support falling and political shocks increasing it is an opportune time for investors to seek alternative and more flexible investment mandates to generate performance.”
David Zalaznick, Manager of JZ Capital Partners said: “Against the current backdrop of low interest rates and elevated economic volatility, investors are increasingly looking for diversification and exposure to longer term assets, such as operating companies and real estate, in their investment portfolio that have positive earnings yields. The AIC Flexible Investment sector provides investors and advisers with access to a diverse range of investment styles and strategies for those seeking decent returns without the volatility from equities.”
Opportunities to be found
David Zalaznick, Manager of JZ Capital Partners said: “We continue to see attractive real estate opportunities in the retail, residential and office sectors in Brooklyn, New York and South Florida, particularly in off-market assets with compelling value-add opportunities. The sector has enjoyed tremendous growth in recent years, with a steady increase in rents and demand continuing to exceed supply, giving us further confidence that it’s a solid long-term investment opportunity with significant capital growth potential and secure income returns.”
Peter Webster, Assistant Fund Manager at Henderson Global Investors who works alongside Ian Barrass and James de Bunsen, Henderson Alternative Strategies Trust said: “Henderson Alternatives Strategies Trust (HAST) aims to provide access to alternative and specialist asset classes. The Trust focusses on Private Equity, Specialist Sector, Specialist Geography, Hedge Fund and Property investments. With valuations high across asset classes we have been increasing our exposure to long/short hedge fund managers with a proven ability to generate returns during both up and down markets. Whilst listed equities have struggled to generate strong earnings in recent years, private equity firms have shown an ability to improve efficiency and cut costs to expand margins whilst also growing top-line revenues. We continue to find opportunities within private equity, attracted by finding growth in a low-growth world.
“Last of all we have a positive outlook on floating-rate credit instruments, instruments that re-price based on a benchmark rate of interest. Our positive outlook is driven by historically low borrowing rates leading to low default rates, high yields in a yield starved environment and the fact that the floating rate nature of these instruments protects against any rise in benchmark interest rates.”