The manager of the £84m fund says markets have priced in an acceleration in corporate profitability but he believes company profits have hit a ceiling and will struggle to see any further growth for the foreseeable future.
“It’s been a fantastic period for equities since the bounce back in global equities markets following the eurozone crisis in 2011,” he said.
“However, earnings have not kept pace with the market rally and that means we’re becoming increasingly reliant on earnings growth to push the market higher.”
“Corporate earnings have had little progression since the middle of 2011, dividends have chipped in a regular contribution [to rising markets] but the big story with the multiples is how much the market is betting on corporate earnings.”
“The question we have to ask ourselves now is what is going drive the market from here? Prospects for earnings growth are pretty bleak.”
Roberts view has propelled him to keep a high cash weighting in his portfolio as he says he is finding it difficult to find stocks that suit his contrarian investment style.
Roberts has sold down Japan and industrials holdings over the last year leaving the fund with 8 per cent of the portfolio in cash.
“It’s higher than I’d like it to be which reflects the difficulty I’m having in finding new ideas within the broader market,” he said. “I see a paucity of value across the wider markets.”
However, he says he is not in a rush to invest it and that he always keeps a relatively high cash weighting of between 3-5 per cent to fund redemptions or move quickly to purchase a stock without having to sell elsewhere.
Roberts also expects a severe market correction to hit world equities market in the next two or three years which will partly be caused by the absence of earnings growth and partly by an external event outside of the financial system.
“We all know that markets don’t move in a straight line although they have done for the last two years – it’s going to be a choppy ride.”
The fund was launched in February 2012, and has been the eighth best performer in the IMA Global Equity Income, out of 26 funds, since.
Since it launched, the fund has returned 34.9 per cent beating its sector average and benchmark – the MSCI World Index - which returned 30.24 per cent and 28.41, respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Roberts says despite his top down perspective there are parts of the market such as IT stocks that are starting to pay dividends.
“You have likes of Facebook, the sexier end of the market, trading on very high multiples which I baulk at and would never go near it,” he said.
“At the other end of the spectrum you have the sexy stuff of 10 years ago such as Oracle or Microsoft which are anomalously cheap by comparison.”
The fund has an overweight position in US Equities with more than third of the portfolio invested in North America.
Roberts says US valuations taken on aggregate do look like one of the more expensive regions but that it hides cheap valuations in key sectors.
“If you’re picking stocks the US is still a fertile hunting ground and this explains the allocation of almost 35 per cent of the portfolio to that region.”
He is less keen on emerging markets despite the last several years showing falling valuations.
“It is tempting to say emerging markets have underperformed and therefore we need to allocate to that region, but we’re not taking a top down view.”
“I’ve got some emerging companies on my subs bench but I haven’t moved on them yet.”
Roberts bearish outlook requires a strategy that places a high emphasis on capital protection and buying companies that provide a reliable dividend, he says, but without sacrificing on valuations.
An emphasis on capital protection helped particularly in the two months following a signal from the Fed that it would start to look at tapering its monthly stimulus program.
The signal caused turmoil in markets particularly in emerging markets which have continued to fall. The fund was the third best performer of 32 funds over this period, returning 0.6 per cent. It beat its sector and benchmark which both fell.
Performance of fund vs sector and benchmark since 21 May
Source: FE Analytics
However, Roberts hasn’t made any changes to his portfolio directly as a result of the taper beginning at the start of 2014.
“The kneejerk reaction from a lot of strategists at the time was QE tapering was bad for income strategies; bond yields are going to rise which will be bad for bond proxies in the wider market.”
“They said you should therefore you should sell bond proxies and long duration assets and that didn’t bode well for income.”
“How it goes from her is difficult to judge but I don’t think the world can cope with significantly higher interest rates so QE tapering yes, but I don’t expect short rates to rise significantly any time soon.”
