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FE Alpha Manager Coombs: My investment outlook for 2015

08 December 2014

The Rathbones head of multi-asset investments expects a challenging year in 2015 and in the article below lays out how he is positioned to tackle this.

By Gary Jackson,

News Editor, FE Trustnet

FE Alpha Manager David Coombs’ base case for 2015 is that “there may be trouble ahead”, warning equities will find it more difficult to make progress, bonds will be the “trickiest” asset class to navigate and the need for diversifiers will be greater than ever.  

Presenting his outlook for 2015, the head of multi-asset investments at Rathbones says the coming year is likely to be one of growth, albeit one that comes with few dull moments because of the likelihood of increased volatility across asset classes. In many ways this is like the outlook for 2014, he adds.

“There’s a familiar ring to ‘modest economic growth forecasts’; the shining light in the form of the US, and some impetus from the UK and Asia,” Coombs explained.  

“But we expect downside risks to be much greater in 2015 and for volatility to spike across all asset classes. Global growth could still be derailed by persistent weakness in Europe, and by commodity producers such as Brazil, where currencies look very vulnerable.”

“In 2015, investors will need to be nimble enough to take advantage of these spikes and may need to utilise diversifiers, such as hedge fund strategies, to help protect their portfolios.”

Coombs remains overweight equities in his Rathbone Multi Asset Strategic Growth, Rathbone Multi Asset Total Return and Rathbone Multi Asset Enhanced Growth funds, although he now attaches more risks to the asset class than he did 12 months ago.

The US remains the multi-manager’s favourite market as economic data suggests the worst of its soft patch has now passed.

Performance of indices over 3yrs

 

Source: FE Analytics

“It is the only market we believe will continue to benefit from a perpetual easing cycle in the form of sinking energy prices, declining rates and a strengthening currency. On a forward-looking basis, the US is not very expensive, given our overall growth projections,” he said.

Coombs has a preference for technology and healthcare sectors, as well as domestic-facing industries, which leads him to funds such as Legg Mason Clearbridge US Aggressive Growth and Legg Mason Royce US Small Cap Opportunity, as well as some more specialised vehicles.

He also plans to remain overweight Japan, a view which is driven by valuations as his fundamental resolve is “low” on the back of less stable political situation and moves by the economy towards recession.

“We are sticking with Japan for now but will not hesitate to reverse our decision if earnings start to deteriorate. The boundaries between long-term structural problems and more cyclical ones may become confused, so experienced stock-pickers are crucial.”


Given the need for a stock-picking approach Coombs preferred fund for exposure to Japan is the JP Morgan Japanese Income Trust, which he holds in his Strategic Growth fund.

Coombs is underweight emerging market equities, preferring index-agnostic funds that focus on picking good companies not economies. He also thinks investors may have to look beyond the stalwarts of Brazil, Russia, India and China for attractive opportunities.

In light of this, he likes the Somerset Emerging Market Dividend Growth fund, the Genesis Emerging Markets investment trust and the Goldman Sachs Next 11 fund.

“Emerging markets now represent nearly 40 per cent of global GDP and just over 80 per cent of the global population – so we can’t ignore it! But the risks of a currency crisis and contagion in 2015 are key reasons why we remain underweight. It’s fair to say that the easy money has been made,” he said.

Performance of indices over 10yrs


Source: FE Analytics

Europe is the manager’s other main equity underweight, where he is pessimistic about the “confused imbalances and inconsistencies in fiscal policy”, pressure on the consumer, a lack of economic growth and the fragile state of its banking system.

Summing Europe up as “an almighty mess”, Coombs only takes exposure in fund where is confident of the manager’s stock-picking skills and can hedge out the euro. This leads him to hold the Baring German Growth Trust, the TR European Growth Trust and the Henderson European Focus Trust.

“We acknowledge that there will be times when being underweight might hurt us tactically, but that’s something we are willing to stomach for a region with pronounced recessionary and deflationary conditions. In fact, investors are at risk of buying a value trap if they jump in on cheapness alone,” the manager said.

When it comes to the UK, Coombs has a slight underweight. This is due to the political risk surrounding the country, as the general election means either an in-out EU referendum under a Conservative-led government or negative consequences for some sector after a Labour victory.

“Throw in the very real prospect of a hung parliament and the possibility of two elections, and everything points to a turbulent time for UK assets and, more specifically, for domestic companies.”

Exposure to the home stock market is taken through the Trojan Income and Miton UK Multi-Cap Income funds.

Coombs labels fixed income as the “trickiest” asset class to work out what to do with in 2015. He notes that few people expected bonds to make the double-digit returns they made in 2014.

“This view would normally lead us to be very underweight; a consensual view right now. But the view on the performance of fixed income 12 months ago was also very consensual and very wrong. The biggest risk to a negative outlook is that inflation could surprise on the low side. If inflation continues to fall, real yields will increase, even if bonds trade sideways from here,” he explained.

“So holding short duration assets, and AAA to AA rated corporate bonds, should act as good diversifiers in a portfolio that is overweight equities. So whilst it may feel uncomfortable, there’s quite a strong case that fixed income markets could end 2015 where they started but with an increased real return.”


Given this complex backdrop, Coombs prefers funds with a more strategic approach like M&G Macro Bond and GF Liontrust Global Strategic Bond.

The FE Alpha Manager also stresses the need to diversify portfolios away from equities and bonds over the coming year, concluding: “We believe that it is important that a part of any portfolio is invested in uncorrelated assets, but the lack of structural momentum behind some markets and the intervention of geopolitical mind games, means that portfolios could be exposed to less return and more downside risk next year.” 

He notes that property, infrastructure, renewable energy and alternatives can offer sources of portfolio diversification but points out that investors in these areas will have to accept a degree of illiquidity.

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