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Woodford, Bezalel & Sullivan: How equity, bond and multi-asset managers see Trump’s win

10 November 2016

FE Trustnet finds out how top managers investing in a range of assets are reacting to the election victory of Donald Trump.

By Gary Jackson,

Editor, FE Trustnet

News that Donald Trump has come out on top in the hard-fought campaign to be US president took many by surprise yesterday, as the polls had put rival Hillary Clinton on a slight lead.

While the market reaction was nowhere near as bad as feared – the FTSE 100, for example, ended the session up 1 per cent – the uncertainty created by the victory of the political newcomer has led many to question what could be in store for markets over the coming months.

The overriding message from the investment world is for investors to not panic and form a measured response to the news. However, it is worth finding out more about how the experts expect the next few months to unfold.

With that in mind, FE Trustnet discovered what UK equity manager Neil Woodford, strategic bond manager Ariel Bezalel and multi-asset manager James Sullivan think after the election and what it means for their portfolios.

 


Neil Woodford: “We have a playbook on what happens next”

Woodford, manager of the £9.1bn CF Woodford Equity Income fund, concedes that he was surprised by the victory of Trump and agrees that there is some near-term difficulty in predicting what kind of policies the new president will bring in.

However, he added: “From a financial market perspective, to an extent, we have a playbook on what happens next, courtesy of the aftermath of the EU referendum in June.

“Given the relatively muted response from markets thus far, perhaps investors have learnt that there is no need to panic – it was wrong to overreact to the Brexit vote and in my opinion it would be wrong to overreact today.”

That said, the FE Alpha Manager argues that Trump’s election could “puncture the love affair” that the market has had with emerging market equities and debt during 2016, should some of his policies undermine free trade and globalisation. But he notes that what is said on the campaign trail does not always end up in policy and some of Trump’s more outlandish ideas may never be implemented.

Performance of fund vs sector and index since launch

 

Source: FE Analytics

Looking at monetary policy and Woodford believes that a December rate hike by the Federal Reserve has become less likely. This is because the central bank will be mindful of the potential volatility that the surprise result could cause in financial markets and will be keen to avoid exacerbating this through a rate increase.

“Turning to the portfolios, my initial judgement is that Trump’s victory doesn’t change the fundamental assumptions that I have incorporated into my investment strategy. I remain confident in the positioning of the portfolios and their ability to deliver attractive returns over the long term,” he said.

“Clearly, our significant weighting towards the healthcare industry has weighed on performance for much of the year, as the market has fretted about the prospect of a Clinton presidency and what that may mean for drug pricing. Now the outcome is known, the prospect of drug pricing legislation is off the agenda.

“Meanwhile, in California, proposition 61 which would have limited the price of prescription drugs in the state, has been voted down. From a sentiment perspective at least, the news should be positive for this important part of the portfolio.”

But Woodford is not complacent about the potential for political risk, noting that Europe has several significant elections looming over the next 18 months. “It would be wrong to assume that America has a monopoly on disgruntled voters and we will keep a very close eye on political developments,” he finished.

 


Ariel Bezalel: “Trump’s victory has raised the level of market uncertainty”

Bezalel, manager of the £3.2bn Jupiter Strategic Bond fund, is expecting greater market volatility over the coming months despite the muted reaction in the immediate aftermath of the election and warns that this could prove negative for risk assets such as equities and credit spreads in the short term.

“Conventionally, a risk-off environment, in this case the end of the US election campaign resulting in a Trump victory, should benefit US Treasuries short term,” he added.

“However, medium term this is unlikely to be the case since Trump has been particularly vocal on the need to boost fiscal spending, saying he wants, at the very minimum, to double Hillary Clinton’s proposed $275bn infrastructure programme, a measure he said he would fund via debt issuance.

“A debt-funded infrastructure programme of this scale could help to stimulate the economy and be quite inflationary – an environment that would be negative for rates and fairly positive for equities. Therefore, longer term we expect the US yield curve to steepen.”

Performance of fund vs sector and index since launch

 

Source: FE Analytics

The FE Alpha Manager notes that he did not position his portfolio to benefit from a Trump or Clinton victory. He points out that his positioning more reflects the belief that monetary policy – whether it be in the US, Europe or Japan – has reached its limits and future stimulus is highly likely to come through fiscal channels.

“Trump is likely to deliver an expansionary policy to encourage economic growth. It would have been the same if Clinton had won,” the manager said.

“This shift in thinking about the nature of stimulus going forward was one of the key reasons why we reduced the duration of the portfolio significantly since July from 5.1 to 2.9 years today. We did this mainly by selling our medium and long dated US Treasuries and initiating a short position in the bund (around 10 per cent of the portfolio) back when they were trading with negative yields.”

Bezalel adds that other moves made in Jupiter Strategic Bond’s portfolio recently include implementing some credit spread hedges (2.16% North American HY CDX and 2.95% European Crossover), trimming longer dated investment grade and high yield bonds, and adding a 1.9 per cent position in gold mining convertibles, which would be beneficial in a risk-off environment.

 


James Sullivan: “Positioning for a ‘soft Trump’”

Sullivan, who runs Coram Asset Management’s multi-asset range, is another manager who admits surprise at the election result but suggests that the Trump seen on the campaign trail might not be the same as the one that ends up in the Oval Office.

“Trump’s rhetoric during the campaign was ‘unconventional’ at best, and we doubt this is the Trump we will see as president and commander in chief. We are likely to see a heavily watered down version. A ‘soft Trump’ as it were,” he said.

“Just a few weeks ago, Trump was threatening to throw Clinton in jail - today he said the US owed her a ‘debt of gratitude’ for her service. So we have already seen a softening in rhetoric. However, the electorate voted for ‘hard Trump’ - so it will be interesting to see how that is managed.”

Key to Sullivan’s short-term outlook is how Trump’s “fragile” relationship with the Federal Reserve develops. This will have a material effect on the US’ monetary policy and has implications for financial assets globally.

Performance of fund vs sector and index since launch

 

Source: FE Analytics

“We will not be implementing any material changes to our portfolios in haste. Given the market movements, what may have been ‘right’ in the morning would have been ‘wrong’ by lunchtime - currency and equity markets moved intraday by a considerable amount already. Markets are still coming to terms with the news and pricing of assets remains volatile and potentially fragile,” he said.

“It is treacherous at best, trying to piece a portfolio together from one week to the next with so much noise. So we must take a considered medium-term view, whilst being willing to participate in opportunities that we feel represent attractive risk-reward dynamics over the shorter term – UK real estate, domestic banks, asset managers to name just three sub-themes within our UK exposure.”

The manager adds that Coram’s multi-asset funds have “ample risk” within them but is sticking with its usual defensive strategies of gold, dollars and the yen. “Over diversification can often be dilutive to total returns, but at present, diversification is our friend in such an uncertain world,” he concluded.

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