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Potter: FTSE to hit all-time high this year

25 February 2013

The US will “go gangbusters” in 2013 and drag the FTSE to a new record, according to the highly regarded income manager.

By Thomas McMahon,

Reporter, FE Trustnet

Risk-aversion is the real bubble in the markets, according to Gary Potter, co-manager of the Thames River multi-manager funds, who says that overly cautious investors are set to miss out on the opportunity of a lifetime.

ALT_TAG Potter (pictured), who runs the £677m Thames River Distribution fund, says that this is the year when markets are going to decisively turn and the FTSE will reach an all-time high.

He adds that investors have been so brainwashed by negative news that they are set to miss out on the rally and are likely to buy in at the peak.

"2013 will be a very important transitional year and the year when the real inflation bubble starts to deflate, and that is the bubble of risk aversion," he said.

"There’s a massive bubble in taking no risk and there’s the idea that risk is a one-way thing, but for us it is not, it works both ways."

"There’s a positive side to risk, that is that markets can go up as well as down. There was a YouGov survey recently that showed how 75 per cent of people were prepared to take no investment risk at all."

"But inflation is going nowhere so people are going to lose lots of money on their bank deposit. Our four-year numbers show we are up 50 per cent over that time, which has whipped inflation."

Performance of fund vs sector over 4yrs

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Source: FE Analytics

Data from FE Analytics shows that Thames River Distribution, which Potter co-manages with Rob Burdett, has made 55.58 per cent over four years, while its IMA Mixed Investment 20-60% Shares sector has made 45.39 per cent.

The consumer prices index is up 14.44 per cent over the period.

Potter’s fund yields 4.7 per cent – higher than the average fund in its sector and the IMA UK Equity Income sector.

Potter says that both institutional and retail investors are far too risk-averse.

"Even Albert Edwards, a well-known bear, said that pension funds have way too much in bonds rather than equities," he continued.

"There are a lot of funds that are running high cash balances, certainly they are going to be dragged kicking and screaming into the markets when the support is there."

"It could be a virtuous spiral which takes equities to expensive valuations. Within 12 months we will see an all-time high on the FTSE."

"As long as the economics are seen to be stable-to-improving, people will see there’s no reason not to be in equities."

"We have to do something; this is the opportunity of a lifetime for IFAs post-RDR to get investors into their business."

"They are going to have to go to clients and be creative in explaining how to put money in the stock market."

According to Potter, the driver of the recovery this year will be the domestic US economy, which is benefiting from the return of manufacturing from abroad, and will drive UK markets up, even if they do relatively poorly.

While the FTSE has performed well in the year-to-date, the S&P 500 has done even better, making 13.42 per cent.

Performance of indices in 2013

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Source: FE Analytics

Potter thinks this outperformance will continue.

"We are overweight the US now. We like the US and the dollar and we think the US is the next emerging market."

"Emerging markets as an investment destination isn’t over but these are already very developed. These countries have to import energy and food, inflationary pressures will start to build. They are not any more the obvious place for capital."

"Toyota is now exporting cars from the US to Korea, while Mexican plants are returning to Texas because the cost of natural gas is cheaper."

"The US will be the best-performing economy except for China next year. The EU and the UK are mired in mediocrity, the ECB has done its job but is behind the curve."

Potter says that the best the way to play this reindustrialisation is through the small and mid cap sectors, which have more of a domestic focus.

"They have had a good run but we still like them. We also like larger caps that can target the mid-west," he added.

"We are looking for funds that are accessing more domestic growth in the US. That’s where the action is going to be."

Potter says that there are also signs that M&A activity is recovering in the US.

"Companies have large amounts of cash on their balance sheets and have now got an opportunity. Companies are still quite cautious, but the re-industrialisation of the mid-west is taking effect."

"The economy in the US will go gangbusters in the next year."

Thames River Distribution requires a minimum investment of £1,000 and has a total expense ratio (TER) of 2.33 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.