The manager of the £763m F&C Multimanager Navigator Distribution fund says that he expects markets to remain range-bound in the near future as they digest the sharp moves of the last year and the change in investment climate. However, investors should remain overweight equities into the New Year, he says.
"Markets have had a good year: the UK is up 20 per cent, the US 27 per cent and Europe 20 to 25 per cent depending on the market you look at, which is a heck of a run," he said.
Performance of indices in 2013
Source: FE Analytics
The vast majority of those gains came before the start of August, however: the US market is down since then while the UK market has made marginal gains; only Europe has forged ahead.
"Our thoughts are optimistic on the outlook for equities, but this scenario [of stagnation] is to be expected," Potter said.
"We are not negative, in fact we are overweight equities, but have trimmed that back over the last few weeks. We have sold a few futures to de-equitise."
Selling a future means taking a position that will profit if markets fail to rise to an agreed amount. The investor receives the difference between the future price and the actual price if it is positive and pays it if it is negative.
The position hedges Potter and co-manager Rob Burdett’s equity exposure on their range of funds.
"The fact we are not underweight shows you we are not negative on equities," Potter said.
"Next year we will still be overweight equities and risk assets. It’s too early to put the dampeners on the markets because recently we have just been getting some traction, with synchronised global growth for the first time in many years next year."
"If that comes through, opportunities will be there for even higher levels: I could see 7,500 for the FTSE and 1,900 for the S&P 500."
"Next year, I think it’s reasonable to expect 10 per cent returns as a starting point. It could be more if we get a growth shock."
Potter says the traditional Christmas rally around the holiday period is possible this year, but before then he expects markets to be quiet.
Performance of indices Dec 2012 to Jan 2013
Source: FE Analytics
Potter says a lot of money will come back into equities when major institutional investors reverse their underweights.
"I think there are many people who still have plenty of cash – major pension funds and insurance companies, for example – because they haven’t believed the outlook," he said.
Potter was very bullish coming into the year, and has been to some extent justified. However, he acknowledges the market may fall short of his prediction.
The manager thought that 6,890 was possible this year, but the market has so far reached only 6,840 at its peak and has since fallen to 6,680.
He says that there has been a relative shortage of equity in recent years, with companies preferring to issue debt – Apple is one such example.
The manager says that this, along with the M&A he expects to pick up, will provide further support for shares.
He also expects Vodafone’s huge payout to shareholders from the sale of its stake in Verizon Wireless – which amounts to £52bn – to be ploughed back into stocks in the coming months.
"I think people could be surprised at how far this market can go," he said.
F&C Multimanager Navigator Distribution sits in the IMA Mixed Investment 20%-60% Shares sector and is in the top quartile over one, three and five years.
Over three years it has returned 22.76 per cent while the sector has returned 16.33 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund currently has 22.77 per cent in UK equities, 5.33 per cent in European equities and 2.31 per cent in Japanese shares. It has 3.11 per cent in the US, 3.8 per cent in Asia and much of its 14.27 per cent "specialist" bucket is in equities.
The fund has just 36.22 per cent in fixed interest and small amounts in property and cash.
Potter says he and Burdett have added two new funds recently: Hermes Asia ex Japan Equity and BlackRock Asian Growth Leaders.
The Hermes Asia ex Japan Equity fund was launched only in October of last year and is the best-performing of the 84 funds in the IMA sector since then. It is institutional, although it is available on some platforms.
Performance of fund vs sector since Nov 2012
Source: FE Analytics
BlackRock Asian Growth Leaders is an offshore fund that has limited platform availability, although there is a share class with a $5,000 minimum investment.
It was launched at the same time as the Hermes fund and has returned 31 per cent since then: the third-best result out of the 161 offshore Asia Pacific ex Japan funds.
The BlackRock fund has ongoing charges of 2.26 per cent and the Hermes fund of 0.89 per cent, F&C Multimanager Navigator Distribution has ongoing charges of 2.41 per cent.
