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Has all the “easy money” already been made this year?

22 February 2017

Mike Willans, who runs the CF Canlife Global Equity and North American funds, tells FE Trustnet why he has increased his exposure to defensive stocks following the recent market rotation into value.

By Lauren Mason,

Senior reporter, FE Trustnet

All the “easy money” available to value and cyclical investors has been made and markets are yet to factor in the longer term repercussions of Donald Trump’s policies, according to Canada Life Investments manager Mike Willans.

Willans, who heads up the CF Canlife Global Equity and North American funds, reduced his overweight positions in cyclical and financial stocks to underweights at the start of the year in favour of consumer staples such as Kellogg’s and Proctor & Gamble.

He warns that the recent spike in value stocks was particularly violent because the market area has been so unloved for a number of years, but believes there are enough headwinds on the horizon to warrant a switch back to quality over the next few months.

Performance of indices over 1yr

 

Source: FE Analytics

As such, the manager held a 7.8 per cent cash weighting in his US equity portfolio up until yesterday, when more than half of this was deployed in lower risk stocks.

“If there’s a need to have tactical cash weighting we will do so. In the global financial crisis, I had a higher cash weighting (than 7.8 per cent),” Willans (pictured) said.

“Essentially I think the easy money has been made. What we have seen with the Trump rally is markets rising very rapidly, but also financials and cyclicals stocks have lifted significantly. The question now is whether that continues or not.

“I very much feel the easy money has been made and we need a phase now where we’re going to understand the policies that are being put forward and their likely implications. I think that a lot now really has to be delivered to keep stocks where they are.

“We have tactically backed-off. I still think this year looks okay, but we are slightly more cautious over the short term.”

During the first half of last year, high levels of geopolitical uncertainty and a hunt for yield sparked by low interest rates led to a surge in high quality and dividend-paying ‘stalwart’ stocks. 

As so-called ‘bond proxies’ and bonds became more expensive, a widespread belief that fiscal loosening will be introduced – chiefly a result of Trump’s election as US president – led to a sharp rotation from quality into attractively priced cyclical and value plays.

While what has been dubbed as ‘Trump euphoria’ continues to bolster markets, Willans warns that this may not have much further to run.

“I think it’s about implementation and understanding how these policies will pan out. It’s all very well saying that you’re going to do something, but getting the policies and people in place takes time and perhaps longer than the market is expecting it to,” he explained.


“Very quickly, any stock to do with infrastructure spending or to do with growth lifted very quickly and, if you want a ship today, how long does it take to get delivered? The answer to that is probably eight to 10 years.

“A bigger military yes, more infrastructure spending yes, but, will we actually see that in growth? I think we have to have a phase where there’s a bit more clarity and consideration in terms of what all those policies mean.”

The manager says the impact potential trade barriers will have on the likes of China and Mexico also remains unknown and, given that the S&P 500 index is trading on a 10 per cent premium relative to history, investors too gung-ho on the macroeconomic backdrop could be biting off more risk than they can chew.

In an article published last week, research conducted by Natixis also found that many investors significantly upping risk levels in their portfolio are not taking additional, subsequent risks such as currency fluctuations into account.

As such, Willans believes there is still more volatility to come and that market movements could be even more pronounced this year than they were in 2016.

Performance of indices in 2016

 

Source: FE Analytics  

“The Trump election has allowed optimism about the future to increase. You have a situation where confidence is higher, the consumer is a bit happier, companies will be a bit happier to spend and that all combines to create levels of growth that are better than everybody thinks,” he said.

“The risk is that we are eight years into the cycle. The cycle is okay, it’s not great, but if you throw a stimulus into US economy late into the cycle, perhaps that’s too much, even though we think growth will pick up a bit and might kick out 2.75 to 3 per cent as these policies are implemented and as confidence increases.

“Maybe it’s just too much and maybe it doesn’t need it: unemployment is already quite low. So I think we have to be quite careful. Yes, economic activity is lifting and the expectations are lifting but whether that is right or not is a slightly different question.

“The infrastructure spending, the military spending, the trade barriers Trump is talking about, for a while growth is going to look better but I think it is much more interesting to consider the long-term sustainability of those policies and the impact it will have on markets.”

As such, Willans has increased his weightings in both portfolios to more stable earners and consumer stocks, such as the aforementioned companies Kellogg’s and Proctor & Gamble.


He says that, over the past few months, both of these stocks have underperformed relative to value plays. As such, it has meant he has been able to buy high quality companies with stable earnings and strong outlooks at a price which is near to their market rating.

“Both of these stocks are macro calls,” the manager said. “I think that economic momentum is going to dip a little bit. Basically, growth expectations have been rising, everybody is optimistic but, tactically-speaking, it’s not about having less growth. It’s about the rate of growth stabilising which tends to change people’s expectations.

“I think it’s very interesting getting a very large attempted takeover in the quality space over the weekend [Kraft Heinz’s bid for Unilever], it just tells you that valuations are too low, when a large global entity wants to take over a very large UK/European entity. I think that sends a very strong message.

“This approach, using these high level factors, really does help significantly over time. I think it’s the best way of explaining what we do and why we do it.”

 

Over the last decade, CF Canlife Global Equity has achieved a top-quartile total return of 133.08 per cent compared to its average peer’s return of 92.09 per cent. It is also comfortably in the second quartile for its three- and five-year total returns.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

Similarly, CF Canlife North American is in the top quartile for its total return over three and 10 years and has outperformed its sector average over the last five, although it resides in the third quartile over this time frame.

Both funds have an ongoing charges figure of 0.83 per cent.

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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.