The market is in the early stages of an equity bull run, says head of multi-manager at Thames River Gary Potter (pictured), who thinks risk-averse investors will live to regret avoiding equities. Potter points to a recent poll conducted by YouGov, which found that 71 per cent of adults said they were willing to take on only a little risk or none at all in their pension, savings or investments.
He says that the better long-term growth potential of equities, combined with historically expensive valuations in the bond market, makes the decision between the two asset classes a "no-brainer".
"People have been brainwashed into thinking all they need is gilts and government bonds on a long-term view – I’m categorically saying they are wrong," said Potter.
"If you look at the average return of equities, high yield and property over the last 20 years, you’re looking at about 400 per cent. Over the same period bonds have returned about half that, even though they’ve just gone through a bull market."
"Moreover, I think 2013 could be a year of transition for equities and bonds."
"Pension funds have been buying bonds like they are going out of fashion. Governments have been buying gilts like they’re going out of fashion through quantitative easing, but both of these are likely to stop."
"I think we may have reached a point where the pressure of selling equities has come to an end and the obsession with buying bonds comes to a close."
Performance of asset classes over 20yrs
| Name | 20yr returns (%) |
| IPD UK All Property | 413.72 |
| FTSE All Share | 378.07 |
| IMA Sterling Corporate Bond | 206.14 |
| IMA UK Gilt | 181.42 |
Source: FE Analytics
Potter, who heads up the £650m Thames River Distribution fund with co-manager Rob Burdett, agrees with Schroders’ Richard Buxton, who recently said "we are entering the foothills of a new bull market".
He thinks the FTSE could be at "6,600 or so" by the end of this year and says there is no reason why the index cannot breach the 7,000 mark and reach an all-time high within three years.
"I think we are running out of things to be negative about," Potter continued. "The European situation is not solved, but seems to be on the right track, and I suspect that the US will have the power to raise the debt ceiling."
"China looks better and crucially for markets increased M&A activity is realistic after years of us being in a credit crunch."
"Starting valuations [in equities] aren’t dirt cheap but reasonable, and certainly cheap compared with other asset classes. Dividend and pay-out ratios are also good."
"If there is indeed a switch out of bonds and into equities from pension funds, I see no reason why it can’t reach an all-time high – why not?"
Potter says a big reason for the extreme risk-aversion among retail investors is because of scaremongering from regulators.
"Retail investors and advisers have been beaten so senseless about risk, that the idea of risk is now seen as a bad thing," he continued.
"A lot of what the regulator has done has been positive, but advisers are scared stiff to do anything these days."
"In a year’s time, a lot of investors stuck in low-yielding bonds may turn around and see the FTSE at, let’s say 6,600, and ask their adviser why they haven’t made any money."
Thames River Distribution was underweight equities this time in 2012, but Potter and Burdett moved to a 5 per cent overweight position by the middle of the year.
The fund, which sits in the IMA Mixed Investment 20-60% Shares sector, has 48 per cent in equities and 11 per cent in property. It can hold a maximum of 60 per cent in equities.
"We may increase our exposure a bit if there is a little more certainty surrounding the fiscal cliff," Potter added.
The fund is up 24.12 per cent since its launch in October 2007, beating its IMA Mixed Investment 20-60% Sharers sector average by 8.7 percentage points, albeit with more volatility.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
The managers’ decision to increase their equity exposure has paid off; in the last six months, the fund is up 8.38 per cent, compared with 6.93 per cent from its sector.
Potter believes that last year’s rally is "just the tip of the iceberg", but says he would expect the most recent surge – which has seen the FTSE break the 6,200 barrier for the first time since January 2008 – to "pause for breath" before long.
Thames River Distribution is available with a minimum investment of £1,000 and has a total expense ratio (TER) of 2.33 per cent. It has a yield of 4.8 per cent, which is well above average for its sector.
Among the fund of funds’ biggest holdings are Artemis Income and JOHCM UK Equity Income.
Potter heads up five portfolios at F&C – which owns Thames River – in total, with combined assets under management (AUM) totalling £2.2bn.
The manager will speak in more detail about his 2013 outlook during a series of presentations at the Alpha Generators roadshow later on this month, which will take place across nine locations in the UK. If you are a financial adviser and are interested in going to one of these events, please register here.