The high valuations of equity markets worldwide combined with an uncertain macro background calls for investing in unloved stocks and raising cash levels, according to Sarasin & Partner’s Lucy Walker (pictured). 
The co-manager of five FE Crown-rated Sarasin Fund of Funds Global Strategic Growth fund is currently holding higher cash levels than the portfolio has ever held before, due to the low yields of traditionally ‘safe’ fixed income assets such as government bonds and record low interest rates across the globe.
Currently, the £16m fund holds 6.2 per cent in liquid assets on paper, although some of the funds that Walker and co-manager Sam Jeffries hold also have elevated cash weightings themselves.
“The reason for this weighting is simply valuation. With my value style I think it was pretty obvious that, not necessarily that these companies were horrendously expensive, but market valuations across the globe are pretty elevated. It’s why we’re holding liquid assets as cash and at the highest level it’s ever been,” she explained.
“On a look-through basis that level could possibly be closer to 10 per cent. That really is an indication of that fact that, while there’s relative value in equities, central banks have interest rates at record lows and, should there be a mild crisis round the corner, which we don’t foresee at this stage but black swan events can’t be predicted, I think it’s important to have a balance – especially running a relatively cautious portfolio.”
“You have to consider the fact that these central bankers can do basically nothing if there’s another crisis. They have no tools whatsoever except QE and arguably there’s already so much liquidity in the market that it might not make much difference. Clearly the market would like it, but the reason we’re holding that amount of cash is because actually we don’t see as much value in traditional asset classes.”
For the fund of funds manager, it isn’t just traditional asset classes she is steering clear of. While Walker is overweight Japan and is very bullish on the popular market, she is turning to unloved emerging markets to seek value opportunities.
“We have got some exposure to India, which is funny because that couldn’t have been more consensus about a year ago, but actually everyone is seemingly starting to go off India and I’ve been topping up in my fund because of the valuations compared to where they were. Modi was elected in May last year and to September it was a serious consensus rally. Everyone was overweight,” she said.
Performance of index May 2014 – September 2014
Source: FE Analytics
“I completely agree that there was a good reason for that but I think people got a bit optimistic about how quickly reforms can happen. India is the largest population in the world, it’s 50 years behind where it should be in terms of its development and there’s no way that Modi was going to be able to come in and make all these big changes that everyone thought that he would be able to. We were much more of the view that he would be able to drip-feed. Every decision he makes has a long-term gain and he’s just taken a step-by-step approach in getting to that long-term gain.”
Despite a reasonably strong start to the year, the MSCI India index has flatlined over the last couple of months, dragging the index’s return year-to-date down to 1.99 per cent.
Performance of indices in 2015
Source: FE Analytics
This is a far cry from last year, when pro-business reformist Narendra Modi was elected prime minister in a landslide victory, which caused the market to rocket in May.
Currently, Modi is working towards creating millions of manufacturing jobs by launching India’s biggest overhaul of labour laws since independence.
However, critics have said that this planned reform, alongside others, are nothing more than hot air and are denting consumer confidence as time goes on and nothing is implemented.
“Whenever the odd thing appears not to be quite good enough, the market sells off and India’s certainly not been a good market this year,” Walker admitted.
“That doesn’t railroad my story, though – there’s still enormous opportunity and, as long-term investors, we have to have some exposure to India, and why not get the exposure when the markets are losing their love for it?”
“I definitely try and pinpoint things where there’s a long-term fundamental story. Japan was that example a few years ago.”
Other emerging market plays have worked in Walker’s favour. In April 2014, the fund had a China weighting. Thankfully, according to the manager, the position was sold before the stock market began selling off in May, following a rally since July 2014.
Performance of index from July 2014
Source: FE Analytics
“We didn’t sell because we expected [the rout] to happen, it was gratuitous, but it was really on the back of valuations. In China you did see a totally insane rally in A shares and it was just one of those charts that went up in a straight line. We thought, ‘what is driving this?’ It wasn’t fundamentals. Ultimately our long-term position is all about fundamentals and I would say when we bought that China position, there was an element of my contrarian side of things because at that point, everybody hated it,” she explained.
“There was a gap between where we thought they might end up and where the market thought they were, so on a sentiment indicator, we took a relatively small position. Given the money we made there it still added substantial money in terms of attribution and obviously now, thankfully, we have cut the position.”
India is the main focus of Walker’s attention in emerging markets at the moment. While the fund doesn’t hold any Latin American stocks specifically, it holds Coronation Global Emerging Markets, a $2bn fund that has a 31.5 per cent weighting in the Americas.
“Coronation is a South African asset manager, and they are really high quality, they focus on valuation. I have to fight to like a growth manager because it’s so against what I normally invest in, but when I find a really good one it feels great, because it will blend nicely with something the value products that I traditionally like. I know [Coronation] are really consistent and disciplined, and that’s what made me happy to invest in them.”
Sarasin Fund of Funds Global Strategic Growth was launched in 2012, and has achieved a top-quartile return of 29.46 per cent over three years. It was recently awarded a five crown rating as soon as it had a long enough track record.
Performance of funds vs sector and benchmark over 3yrs
Source: FE Analytics
The fund has a clean ongoing charges figure (OCF) of 1.35 per cent.
