De Tusch-Lec, manager of the five crown-rated Artemis Global Income fund, says the recent rally in equities has been largely driven by liquidity from the world’s central banks, but authorities’ steps to normalise policy are likely to put pressure on the prices of risk assets.
“It is a big concern,” de Tusch-Lec (pictured) said.“If we accept that this excessive liquidity has pushed asset prices higher then we have to accept that less liquidity will push them lower. I think that when central banks tighten monetary policy, it won’t be good for equity markets.”
He added: “The next 12 months look far more uncertain than the last 12 months have been.”
In order to boost economic growth and stave off the threat of deflation, central banks around the developed world have introduced unprecedented levels of stimulus over recent years through ultra-low interest rates and large-scale money printing.
De Tusch-Lec, like many of his peers, says these policies have pushed the recent bull market in equities forward.
Performance of indices over 5yrs
Source: FE Analytics
Though the Fed is tapering QE and the Bank of England is poised to raise rates, the manager has a bearish outlook as he says the measures have already been in place for too long – meaning the road to normalisation is likely to be volatile.
“On the one hand, rates are low and the economy is strengthening, so you can make a case as to why equities are better than bonds; even though valuations aren’t as great as they have been,” he said.
“However, you have to respect that a lot of that has been driven by cheap money via ultra-low interest rates and excessive liquidity through QE. To square the circle, you have to admit that it has created asset price inflation.”
“Although it hasn’t created credit growth, it has created wealth for those who have been able to lever-up. In a normal cycle, the Fed would have already stopped QE and the Bank of England would have raised interest rates, but this isn’t a normal cycle.”
He added: “They have felt the need to get economies up to double speed before they tighten.”
While investors have been well-rewarded for holding equities over recent years, the available returns in 2014 have been much flatter.
Performance of indices in 2014
Source: FE Analytics
De Tusch-Lec says this is an early warning sign that the coming few months are likely to be difficult for active managers.
“This is still a tricky market and it has not been an easy year,” the manager said.
“I don’t know if we are at the end of the bull market, but there is no doubt we are closer to the end than we were two years ago. My view is that the last few years have been a very macro-driven market where you could, as an example, just buy European equities, not sell them and you would outperform.”
“The probability of outperforming is much lower, now valuations are higher and global liquidity is about to tighten. It means performance dispersion is going up.”
“For instance, last year every stock in the S&P went up so a lot of the alpha you could generate came down to choosing the right beta in your portfolio.”
He says that active managers are now operating in a very different environment.
“It’s a market where dispersion of returns is creeping in. Expectations are high and earnings growth has come in ahead of expectations, but a lot of that good news had already been priced in.”
De Tusch-Lec launched his £1bn Artemis Global Income fund in July 2010.
According to FE Analytics, it has been the best performing portfolio in the IMA Global Equity Income sector over that time with returns of 80 per cent, beating its benchmark – the MSCI AC World index – by more 30 percentage points.
Performance of fund vs sector and index since July 2010
Source: FE Analytics
The fund has beaten its benchmark in every calendar year since its launch.
It was top decile in 2012 and 2013 and though the manager says this year has been difficult, the fund is top decile so far in 2014 with returns of 5.26 per cent.
As a recent FE Trustnet article highlighted, de Tusch-Lec designed Artemis Global Income for UK investors who want to diversify away from the UK Equity Income sector. Because of that, he holds just 8 per cent in UK equities.
Instead, the manager has a globally diverse portfolio with decent exposure to North America, the eurozone, the EMEA economies, Asia Pacific ex Japan, Latin America and Japan.
In order to prepare his portfolio for a world without QE and higher interest rates, the manager has been rotating his portfolio towards mid caps and more cyclical sectors as he says certain defensive stocks will underperform as rates rise.
“I’m keen to get across that I’m moving away from bond proxies because I don’t think they will perform well as monetary policy tightens. Because of that, I would expect my dividend growth to come down over the next 12 months because I’m rebasing the portfolio,” he finished.
Artemis Global Income has a yield of 3.8 per cent and its ongoing charges figure (OCF) is 0.87 per cent.
