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David Jane: Earnings growth will come through in 2014

16 December 2013

The manager of the TM Darwin Multi Asset fund says that while QE has been responsible for much of the rally since 2012, he is confident that profits growth will soon take it to the next level.

By Alex Paget,

Reporter, FE Trustnet

Investors can allow themselves to be bullish in the current environment, according to Darwin’s David Jane (pictured), who says corporate earnings growth will come through in 2014, which will drive the next stage of the rally.

Quantitative easing (QE) from the world’s central banks has been responsible for much of the gains from equities recently as investors have been forced out of cash and fixed income and into higher risk assets. Market bears say that the resulting rally is an unhealthy one.

ALT_TAG However Jane, who heads up the TM Darwin Multi Asset fund, is far more optimistic, as he is convinced that the real economy is moving in the right direction.

“I’m not as concerned as most about this,” he said. “Yes, equities have had a good run because there has been a lot of liquidity in the system.”

“However, the next stage of the rally will come from earnings growth, which will come from better revenue growth.”

Equity markets have performed strongly since the Fed’s introduction of QE3 in September 2012.

Performance of indices since Sep 2012


Source: FE Analytics

However, critics point out those returns have come from equities re-rating significantly while company earnings have failed to keep up. This has led to some indices looking expensive: for example, the S&P 500 is trading on a P/E ratio of 18 times.

While many experts say this means equity markets are overvalued, Jane says they won’t be when earnings growth does come through – something he says will be very likely in 2014.

“Equity markets can go higher if profits and earnings surprise on the upside. People underestimate how probable it is,” he said.

“Nobody has the skill of predicting the future; however at the same time, no-one expects revenue growth and inflation to come through. On top of that, very few people expect sustained economic growth. I mean come on – we are six years into this now.”

“Debt levels in the consumer sector are getting better and debt levels in the corporate sector are non-existent.”

“US companies have $1.5trn of cash on their balance sheets and will have to spend it at some stage; people are too bearish on the economy.”

“We are well below trend in terms of output, and unemployment still remains, so when companies start spending just a little, it will be great news for the economy,” Jane added. ALT_TAG

Jane is confident this will lead to a “virtuous cycle” as people begin to earn more and then can afford to spend more themselves.

He says company management teams know that a capex-led recovery is needed because if they continue to hoard cash, then real wage growth will remain muted or may even fall.

“That’s not good for equities as you are just squeezing the lemon further,” he said.

On top of that, Jane understands why people are nervous about the rally.

He says that since the financial crisis in 2008, it has been difficult for anyone to let themselves be carried away with equities.

Jane understands that investors are concerned that the recent rally has been driven by debt given the huge amount of central bank intervention.

However, he says that all the signs point to an improving economy and the fact that the Fed is considering reducing QE now shows how far along the recovery is.

Although he expects tapering to cause a problem for bond-holders, he says equity investors should have little to fear.

“The next stage of the cycle has to be a gradually recovering economy and the main question is, how important, not just for the economy but asset prices, has QE been?” he said.

“Secondly, when you take that money away and the Fed stops buying bonds, what impact will that have?”

“However, there is this tenuous link between bond and equity prices. Just because bond yields move higher, that doesn’t mean the rug is automatically pulled out from under equity markets.”

Jane, who was formerly the head of equities at M&G, launched his £41.8m TM Darwin Multi Asset fund in May 2011.

It is a second quartile performer in the IMA Mixed Investment 20%-60% sector since then, with returns of 14.79 per cent.

Performance of fund vs sector since June 2011


Source: FE Analytics

The fund has, however, registered top-quartile returns over the past 12 months.

Jane has nearly maxed out his equity exposure – 60 per cent – and has evenly split that allocation between the US, UK, Japan and Europe. While that reflects his bullishness, it also highlights his concerns over fixed income.

He holds just 21 per cent in government bonds and corporate credit and is instead using property and cash to dampen down volatility. These two asset classes combined make up 17 per cent of his fund’s total assets.

He recently told FE Trustnet he sees little value in bonds and prefers cash equivalents instead.

TM Darwin Multi Asset has an ongoing charges figure (OCF) of 1.84 per cent and requires a minimum investment of £1,000.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.