Following a sustained period of equity market gains and with the S&P 500 hitting all-time highs and the FTSE All Share following closely behind, investors have become increasingly sceptical in their outlook for risk assets.
Performance of indices over 3yrs
Source: FE Analytics
A number of leading fund managers have been building up high levels of cash within their funds due to a lack of value in the market and in the expectation of an imminent correction. A recent FE Trustnet poll suggests that advisers and private investors are following suit.
The poll shows that roughly half of our readers have taken profits and built up cash in their portfolios over the last two months.
Stick, who manages the five crown rated Rathbone Income fund, says that investors are right to have become more bearish on equities and while investors shouldn’t be giving up on the asset class completely, he expects volatility to remain for some time to come.
“The last six months in global equity markets have been volatile, directionless, inconclusive, and non-committal,” Stick said.
“Investor sentiment has oscillated, at times quite violently, on factors such as emerging market debt concerns, the impact of tapering, and uncertainty over China’s growth prospects. An ever more fragile geo-political environment increases investors’ anxiety.”
“The bulls focus on improving economic conditions in the US, and a global environment where monetary policy remains easy and accommodative. The bears highlight a scarcity of value in equity markets, and the failure of corporate profits to hitherto match the recovery in stock prices.”
“With this backdrop, it is unsurprising that markets have lacked leadership.”
Because of that, the manager says that building a portfolio in the current market is becoming increasingly difficult. One of the major reasons for that, Stick says, is because there is a dearth of attractively valued, market-leading companies.
“If their shares are too expensive, even the best businesses can be poor investments,” Stick said.
“On the other hand, where we have found cheap stocks, this value tends to reflect blemishes within the business model. So we have a judgement to make with regard to how much business risk we want to include in our portfolio.”
“There are opportunities in this market, but there are also clear and present dangers. In this challenging environment, investment discipline and patience will be crucial.”
Stick has managed his £815m Rathbone Income fund since January 2000.
According to FE Analytics, it has been the second best performing portfolio in the IMA UK Equity Income sector over that time with returns of 244.32 per cent, beating its benchmark – the FTSE All Share – by more than 160 percentage points in the process.
Performance of fund versus sector and index since January 2000
Source: FE Analytics
Those returns have also been consistent. Our data shows that the Rathbone Income fund has only underperformed against the sector in three out of the 14 discrete calendar years that Stick has been at the helm.
Stick underperformed against his peers in 2007 and 2008 and those losses have been attributed to the fact that the manager’s biggest holdings were heavily indebted in the lead-up to the crash and, as a result, were hit particularly hard during the crisis.
The fund did bounce back, however, and outperformed in each year between 2009 and 2012. While it failed to keep up with the sector in last year’s bull market, it is once again top quartile so far in 2014.
Stick currently holds 50 per cent of his fund in FTSE 100 companies and around 30 per cent of the fund is in mid and small-caps. The manager’s more cautious outlook is reflected in his current cash weighting, which stands at more than 6 per cent.
Peter Walls has also allowed his Unicorn Mastertrust’s cash weighting to build up substantially over recent months.
The manager currently holds 15 per cent of his five crown rated fund, which has been a top decile performer in the IMA Flexible Investment sector over one, three, five and 10 year periods, in the money markets.
Walls only invests in closed-ended funds and will usually only buy when a trust is trading on a decent discount to its NAV.
He says that it is increasingly difficult to find good value opportunities and is therefore happy to leave money parked on the sidelines for the time being. However, with the VIX – the standard measure of volatility – at its second lowest level since 2007, he says now is no time to be getting carried away with equities.
“When volatility is this low, I think you are right to be concerned. There is only one way for it to go, it’s just a question of when it happens,” he said.
“Nothing is making me feel that I should be rushing into the market at the moment. We have had two days of consecutive highs on Wall Street, but at the same time the most recent export numbers don’t paint a particularly good picture for global GDP.”
“I was speaking to someone the other day and I thought; as people are starting to become pretty nervous, should I be greedy? But I don’t think I should be at the moment.”