Lees, who manages the JOHCM Global Select fund, is bullish about the global economic recovery and says equity investors will be well-rewarded in the medium-term.
However, he says the recovery could have some negative consequences over the next 12 months.
Lees warns investors that as the US economy moves closer to normalisation, the Fed will be forced to put up interest rates sometime in the next year. He says this will cause problems for bond-holders as prices will inevitably drop, but warns equity investors will also suffer.
"I do think 2014 will be categorised by vicious volatility," he added. "What I would say to anyone who doesn’t agree is, remember 1994 when Alan Greenspan unexpectedly hiked interest rates, which led to a bond massacre? We think that is what will happen in 2014."
"The US is slowly, slowly recovering, and we think it is coming."
"Bonds were massacred in 2004, but equity markets were also hit during the first six months of the year and then recovered in the last six months to remain broadly flat. We think that will happen again next year," he added.
Performance of FTSE All Share in 1994
Source: FE Analytics
The manager says investors had a taste of what will happen earlier in the year.
In May, Ben Bernanke warned the market that the Fed would begin cutting back its quantitative easing programme over the short- to medium-term. This caused a sell-off in both the bond and equity markets.
Performance of US shares and bonds April – July 2013
Source: FE Analytics
Lees has managed the £1.3bn JOHCM Global Select fund with Nudgem Richyal since its launch in September 2008.
According to FE Analytics, the fund has returned 78.42 per cent over that time, making it a top-quartile performer in the IMA Global sector. Those returns mean the fund has also beaten its benchmark – the MSCI AC World index.
Performance of fund vs sector and index since Sep 2008
Source: FE Analytics
JOHCM Global Select has a total expense ratio (TER) of 1.6 per cent, but like other JOHCM funds, has a performance fee as well. The minimum investment is £1,000.
Lees is bullish about the prospects for stocks over the medium-term.
"Over the next several years, I think the permabears will be wrong as the recovery will move towards more mid-cycle and capex-related growth," he said.
Clive Beagles, who manages the JOHCM UK Equity Income fund, agrees with Lees that the global economy is on the road to normalisation and because of that, equities will perform well over the medium-term.
"We have had a consistently positive view on UK economic activity," he said.
"Some people are sceptical of the recent rally and say it is the same old problem as it is all being pumped by debt. I do understand that and we do need the recovery to broaden, but I think that will come through in the next 12 to 18 months."
"Real wage growth should resume soon and the recovery is broadening and is increasingly capex-led," he added.
However, Beagles is also concerned that interest rates in the US will be hiked next year. As a result, he says investors need to start looking at changing their equity portfolio as some sectors will be hurt more than others.
"When bond yields rise, certain equities do struggle to perform as we saw in 1994. However, because of that, the fund is going through a transition into areas that will still perform well in an environment of higher bond yields," he said.
Beagles warns investors to steer clear of bond-proxy style stocks as they will not look attractive when yields on fixed income securities rise.
Instead, investors should look at companies and sectors where earnings would improve in a higher interest rate environment.
"The obvious area is the insurance sector. With non-life insurance, typically a 1 per cent rise in rates leads to a 15 to 20 per cent increase in those companies’ earnings per share and life insurers would also benefit," he said.
"Cyclicals are another, as rising bond yields suggest that the economy is getting better and therefore they should perform well. The final area would be broader financials, as deposit-taking could mean the banks make money again."
"However, the banks need short-term interest rates to rise, but over time the market will anticipate that," he added.
In the insurance sector, Beagles highlights the likes of Aviva, Catlin and Legal & General as beneficiaries of higher bond yields. The manager is targeting cyclical stocks such as ITV, DS Smith and recruitment specialist SThree.
Beagles runs the £2.3bn JOHCH UK Equity Income fund with James Lowen.
Over five years, the fund is the fourth best-performing portfolio in the IMA UK Equity Income sector, with returns of 178.45 per cent, beating the FTSE All Share by close to 60 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund also sits in the top quartile over three and five years. It has a yield of 4.6 per cent.
JOHCM UK Equity Income requires a minimum investment of £1,000, but has an initial charge of 5 per cent if bought directly. The fund’s TER is 1.28 per cent, though it has a performance fee.