Brookes (pictured), who heads up the Schroder Multi Manager range with Robin McDonald, recently told FE Trustnet that he had given his portfolios more of a defensive bias due to his concerns about a long over-due market “shake-up”. While he has changed his UK exposure from Fidelity Special Situations to RWC Income Opportunities, he has decided to take profits from his European and Japanese funds and keep it in cash for the time being.
“We have really scaled back our exposure to Japan and Europe,” the FE Alpha Manager said.
“We just think that cash is a good place to be right now as we expect equities to be fairly rocky over the next 12 months.”
“We have had a tremendous bull market and while the global economy is doing ok, we are slightly more cautious in our outlook for equities. We are certainly less bullish than we have been.”
Japanese equities were one of the real surprise packages last year and one the major beneficiaries of the positive sentiment was FE Alpha Manager Stephen Harker’s £1.2bn GLG Japan Core Alpha fund.
Harker has a value approach to investing and, according to FE Analytics; his fund was the eleventh best performing portfolio in the IMA Japan sector in 2013 with returns of 31.54 per cent. It also beat its benchmark – the TOPIX – by close to 7 percentage points.
Performance of fund vs sector and index in 2013
Source: FE Analytics
While Brookes had held around 6 per cent of his funds in Harker’s portfolio, he has been reducing that allocation through the early stages of this year.
The manager says his decision has nothing to do with fund itself, but he is concerned about the immediate outlook for Japan – like a number of his fellow fund managers – as the market waits for signs that Prime Minister Abe’s “third arrow” of structural reform has been successful.
Brookes has trimmed his exposure to Europe for similar reasons.
“We hold the Schroder European Alpha Income fund, which is managed by James Sym,” Brookes explained. “We have had it for two years or so but we have been trimming it just because it has done so well.”
“We still like the fund a lot, but considering how far European equities have come, we feel it is a market we need to be taking profits from.”
Sym’s fund was launched in May 2012 and our data shows that over that time it has been the best performing portfolio in the IMA Europe ex UK sector with returns of 73 per cent, beating its FTSE World Europe ex UK benchmark by 27.07 percentage points in the process.
Brookes and McDonald have managed the Schroder Multi Manager range, which was formerly part of Cazenove, since October 2007.
One of their most popular funds has been the five crown rated Schroder MM Diversity fund. Our data shows that since they took over the £1.4bn fund it has been a top quartile performer in the IMA Mixed Investment 20%-60% sector with returns of 37.32 per cent.
Performance of fund vs sector and index since October 2007
Source: FE Analytics
It has also beaten the sector over rolling one and three year periods, but has underperformed over five years because the fund didn’t rebound as strongly as the market in 2009 and 2010.
As Brookes has told FE Trustnet in the past, he isn’t afraid to build up a large cash weighting. Cash currently makes up 28.56 per cent of his Schroder MM Diversity fund which is a result of his profit taking and because he sees very little value in bonds.
One area which Brookes has been consistently underweight has been the US equity market.
He told FE Trustnet earlier this year that valuations on the S&P 500 were nearing Wall Street Crash levels.
While the manager doesn’t expect a full blown crisis in the US, he is concerned that investors are becoming carried away with the strength of its economic recovery.
“We have just had some really good employment figures in the US with the number of people seeking unemployment benefits falling by 300,000. We haven’t seen that number since May 2007 which is great news, but our point is that US ratings are at party time levels,” he said.
“It is a high price to pay for an economic recovery. If the world is improving then you expect bond yields to go up, which is normally good for equities. However, the US looks expensive to us.”
US equities have delivered strong gains since the period after the financial crash with the S&P 500 returning more than 100 per cent over five years. The index returned 29.1 per cent last year, which was its highest a discrete annual calendar return since 1997.
Performance of index over 5yrs
Source: FE Analytics
While the majority of market experts expect it to drive the global economic recovery, a number of fund managers have been reducing their exposure to the US.
One is John Ventre (pictured), head of fund of funds at Old Mutual, who says investors should expect significant bouts of volatility as the Fed normalises monetary policy. “An area where we feel the market has become overexcited is the US,” Ventre said. “We have observed just how dependent the recovery is on ultra-low interest rates.”
“When Bernanke and Yellen have talked up the tapering bond yields, at the long end, have risen which has caused mortgage rates to go up and therefore causing mortgage applications to collapse.”
“What that is telling you is that it will be much harder for the Fed to exit QE than many are anticipating.”
While Ventre doesn’t think the US economic recovery is coming to an end, he says that with the S&P trading at more than two times book value, he expects a correction of somewhere between 10 and 20 per cent over the short to medium term.
