Jane, who was formerly head of equities at M&G, had been very bullish over recent years and had consistently maxed out his fund’s equity exposure. However, given that equities have performed very well and the market has re-rated significantly since its lows, the manager says that he is becoming more defensive as earnings need to catch up with companies’ share prices.
“It has been a long time since we have had a blood-letting correction when everything becomes cheap again,” Jane said.
“There are two camps, the first is that markets have run up too high and valuations look relatively high and the second is that it the market looks great going forward because the global economy is recovering, the debt/deflation cycle is coming to an end and because the crisis has been resolved.”
“The latter camp is where I have been, but this year the risks are being proved right. The challenge is that the market needs to catch up with its valuation and that’s why we have moved sideways.”
“Recently, I have been preparing for a correction, but there is no point betting on exactly when it is going to happen,” he said.
According to FE Analytics, the FTSE All Share has returned 103.87 per cent over five years while the average fund in the IMA UK All Companies sector has returned 109.21 per cent.
A huge amount of those returns were generated last year, however. For instance, both the index and sector returned more than 20 per cent in 2013.
Nevertheless, due to factors such as the emerging market induced sell-off in January, the FTSE All Share has made just 0.44 per cent so far this year while the average IMA UK All Companies fund has lost money.
Performance of sector vs index
Source: FE Analytics
Jane says that with the chance of further rerating led rally unlikely and as monetary policy in the US and UK expected to tighten, equities will either keep moving sideways or will sell-off considerably over the coming months.
One of Jane’s major frustrations is that the mindset among investors hasn’t changed despite the equity market’s recent strong performance.
“I find it odd that people still say we are recovering from the recession. We have been recovering for five years now. Now we should be talking about the growth phase because it isn’t about just buying deep value now.”
“People need to accept that the economy is growing, there needs to be a mind-set change. People don’t see it that way, though, and that’s why I think there is a relatively high chance of a correction between now and the Autumn,” he said.
“The problem is, we want to defend our investors but at the same time we need to make money for them over time. We can’t just hide under a table,” Jane said.
A number of managers have warned about the possibility of significant equity market volatility.
FE Alpha Manager Iain Stewart told FE Trustnet earlier this year that UK investors were becoming overly complacent and naïve about the real dangers facing the financial system.
However, Jane says that this is nothing sinister and instead should be regarded as a “sideways consolidation phase.”
“There are some people who think that the recovery is completely artificial and just driven by QE, but I don’t think that is the case, I think it is actually quite normal,” Jane explained.
“I don’t see QE when I walk down the street or when I talk to my friends. That’s not what is impacting on the real economy, it’s more about the banks willingness and ability to lend.”
“I think the economy is on the right track. The final stage of a bull market is when everything goes slightly mad and barmy, but we are nowhere near that yet. It’s just time to be a little calmer,” he added.
Jane launched his £50m TM Darwin Multi Asset fund in June 2011.
According to FE Analytics, it was a top quartile performer in the IMA Mixed Investment 20%-60% sector in last years’ rising market with returns of 13.24 per cent.
However, it has been hit hard by this years’ volatility and as a result is has been the worst performing fund in the sector in 2014.
This means that since launch, the fund has now slightly underperformed against the sector with its returns of 14.99 per cent.
Performance of fund vs sector since June 2011
Source: FE Analytics
Given his views, the manager has built his cash weighting up to 11 per cent and brought his equity exposure down to 47 per cent, which is the lowest it has been for a number of years, as he is finding value within long dated bonds.
Jane has also been rotating his equity his portion.
“What we have been doing is to shift away from areas that could be worst affected if there was a large correction. For instance, we are moving away from consumer cyclicals that have done very well house builders and retailers and moving into industrials, basic materials and oil services.”
“They have lower valuations, less expectations and also I think that the economy, going forward, is going to be less consumer-driven and more capex-led.”
The fund has an ongoing charges figure (OCF) of 1.8 per cent.
