Felton, who manages the £717m M&G UK Growth fund, is becoming increasingly concerned about the outlook for UK equities as he says current investor sentiment is rife with complacency. He says that investors are allowing themselves to be become overly exposed to policy error on the part of central bankers. With the equity markets reaching all-time highs, the manager says the current environment is very similar to build up to 2008.
“The stability in markets comes from a collective sense that central bankers are on top of things and that we should not be worried about the state of the economy,” Felton (pictured) said.
“During the ‘great moderation’ period leading up to the global financial crisis, investors were persuaded that the financial authorities had become more adept at managing peaks and troughs in the cycle, reducing the risk of major economic disturbance. This encouraged borrowers and lenders to worry less about risk, with what turned out to be dire consequences.”
He added: “We can see echoes of this in some markets now.”
Investors who have had exposure to developed market equities, the US and UK in particular, have been very well rewarded over the period since the financial crash.
According to FE Analytics, the S&P 500 and the FTSE All Share have returned close to 150 per cent since the market eventually bottomed in March 2009. Our data also shows that both indices have delivered an average annual return of 15 per cent over the past five calendar years.
The FTSE All Share has made a positive return in four out of the last five calendar years – the exception being in 2011 when the index lost 3.46 per cent – while S&P 500 has been up every year since the crash.
Performance of indices since Mar 2009
Source: FE Analytics
However, the manager is very concerned about the immediate future for risk assets as the S&P has broken through its all-time high recently and the FTSE 100, at its current level of 6,770, is “flirting” with its record high.
On top of that, Felton warns that the implied volatility across bond, currency and equity markets are all at extremely low levels.
One of his principal concerns, even though the Fed has started to taper, is that quantitative easing has gone on for far longer and has been much larger than anyone would have imagined.
He says central banks are going to have to be very careful about weaning investors off the added stimulus as there are no precedents as to what happens next.
The manager warns that crashes only occur when no-one expects them to happen and with the market currently reliant on central bank intervention, he says it is creating a “bubble of complacency”.
“The risks attached to shocks have been heavily discounted away but the fact that bad things have not happened does not mean that they will not happen,” Felton said.
“It feels right in the short-term, during this period of unnerving stability, to exercise an elevated degree of caution.”
Felton joined M&G in December 2004, having previously managed the F&C UK Alpha and F&C UK Dynamic funds. He used to manage the M&G UK Select fund and took over the M&G UK Growth fund, which was launched back in 1968, in December 2012.
According to FE Analytics, since he has been at the helm M&G UK Growth has returned 39.37 per cent, which means it has underperformed against both the IMA UK All Companies sector and its FTSE All Share benchmark.
Performance of fund vs sector and index since Dec 2012
Source: FE Analytics
However, the manager’s longer track record makes for better reading. Our data shows that over ten years the manager has returned 110 per cent to his investors, beating his peer group composite by close to 20 percentage points.
Felton is not the only manager who is becoming increasingly bearish on equities.
Kames David Pringle recently told FE Trustnet that he felt the recent sell-off in mid-caps was a prelude to a wider market correction. FE Alpha Manager Iain Stewart also warned that investors had learned nothing from the 2008 crash.
“People have seen a green light to buy equities because they think there isn’t much downside risk because the central banks will step in if there is trouble. I think that is a dangerous assumption and history shows it is a misplaced one,” Stewart said.
However, Jonathan Webster-Smith – who manages Brooks Macdonald’s fund of funds range – says that while returns from UK equities may be lower than they have been over recent years, the chances of a 2008 repeat are slim.
“We don’t have any immediate concerns about a 2008-style correction. The bottom-line is that we are on the right track, we just all wish it was happening a bit faster,” he said.
“As Carney is planning on doing, I think the time to start raising rates is now. Is there scope for a correction if the Bank of England gets it wrong? Yes, absolutely. However, at this current point in time I think the economy is healthy.”
