Skip to the content

FE Alpha Manager Leyland: Nothing is cheap and there is nowhere for investors to hide

16 August 2017

The JOHCM global equities manager explains why he is diversifying his portfolio in an effort to mitigate losses over the coming years.

By Jonathan Jones,

Reporter, FE Trustnet

Equities have become inherently expensive across the board, according to JO Hambro Capital Management’s Ben Leyland, who has encouraged investors to take a diversified approach to mitigate expected losses. 

The FE Alpha Manager, who manages the five crown-rated JOHCM Global Opportunities fund with deputy Robert Lancastle, has built a high cash weighting and has been diversifying across all regions and sectors.

Recently, many investors have been seeking out pockets of value in the market, with Europe and the emerging markets tipped by some experts and the US market largely considered overvalued following a strong run over the past decade.

Performance of indices over 10yrs

 

Source: FE Analytics

Yet, Leyland takes issue with the idea that the world ex-US is particularly cheap.

“For the last five years people have been saying that the US is expensive therefore Europe must be cheap,” he said.

“But the US deserves to be on a higher price-to-earnings multiple because it has got better companies on average.

“The average US company is better than the average European or emerging market company because European and emerging market indices have a high proportion of leveraged banks, complicated vertically-integrated utilities etc.

“I am not disputing that the US is expensive but Europe is equally expensive on a like-for-like basis. The scarcity value of the best businesses in Europe and emerging markets has actually made them more expensive than comparable businesses in the US.”

Leyland explained: “The problem in Europe is you have a choice between crap businesses and perfectly good businesses on really expensive multiples and that dispersion is even greater in emerging markets.

“For a fund that focuses on not taking on too much downside risk, either from buying crap or overly indebted businesses or expensive shares, we’ve got nowhere to hide.”

Indeed, the manager said there are no markets that can be considered as good value because different areas have rallied at various times over the past 18 months.


“We had a rally from probably oversold positions in US cyclicals and commodity stocks, which led H1 2016 and when you got Donald Trump the US rallied very hard but then year-to-date Europe and emerging markets have caught up,” he noted.

Performance of indices since the start of 2016

 

Source: FE Analytics

“You’ve had financials rallying really quite hard, you’ve had various cyclicals recovering from oversold positions, you’ve had the growth side – the FANGs [Facebook, Amazon, Netflix & Google] and technology-led side – with headlines all over the place about how expensive it is.

“So your big problem is if you think about categorising the market into three there’s value, quality and growth stuff and they’ve all rallied very hard for the last five or six years so now they are all expensive.”

This has been borne out by investor complacency, either explicitly or implicitly, and a fear of missing out on the strong returns seen in recent years.

Leyland said investors are buying equities because there is nowhere else to go, with bonds at record high prices.

“They are very worried – but they are still investing and what worries me most is that the conditions are there, particularly in financial markets, for an almighty crash because everybody is facing the same way,” the manager explained.

However, he said that much like in the US before the financial crisis when there was a perception that the housing market could not fail, there is a growing idea that equities cannot fall.

“You can see the spiralling of passive participation in equity markets is indicative of that and there is a pressure that people are under to keep up with this rising market at all costs is very high,” he added.

“They are buying things which to my mind will more than likely give them a negative return over the next few years. How and when, and how much, I don’t know but it is very hard to see how you make any positive risk-adjusted returns from here in absolute terms.

“Yet, people still play. As long as the music is playing managers will keep dancing and they know it is going to be pretty horrible when the music stops but they don’t know when it is going to stop so professionally they are compelled to keep going.”

As such, the manager has been attempting to diversify across many regions in an effort to spread the risk.

Indeed, in the £326m JOHCM Global Opportunities fund he is 38.4 per cent weighted to the US, 11 per cent to the UK, 19 per cent in European assets and 11 per cent in Japanese equities.

“What we have been trying to do is introduce more value into the fund by diversifying away from the narrowly defined bond proxy, high quality areas,” he said.


“But we have to acknowledge that we are not finding great value in other parts of the world or in other sectors.

“We’ve now got a more diverse portfolio so it should be more resilient to problems that will arise in the future but when those problems arise everything will go down, it is a question of which goes down most.”

Yet, the manager noted that in the current environment there is no such thing as a defensive asset, with a case to be made that any asset class or area of the equity market could lead it down.

He said: “It will depend on the interplay of currency, cycles, macroeconomics, passives and investor crowding and I don’t know what it hits first and that’s what makes me most nervous.

“Even the stocks in the portfolio I can see how they might be the worst thing to be invested in in a given scenario and so the aim of the portfolio now is to diversify across things which might lead the market down because only one of them will so heads we win and tails we don’t lose too much.”

The other way the manager has attempted to insulate himself from a market correction is by keeping a high cash weighting, which currently makes up around 20 per cent of the fund.

“We’re called an ‘opportunities’ fund because it is our job to take advantage of opportunities in the stock market and that means good businesses priced at a level where we think we can make a good risk-adjusted return,” Leyland said.

“What that means is that when opportunities are scarce and we can’t find skewed risk-return outcomes – so I have as much  chance of losing money as I have making money – then I’m much less interest in committing capital.

“Cash is on hand to do two things when the opportunity set is scarce, one is to protect capital when you hit those bumps in the road in markets. But the more important function of it is to allow us to get on the front foot when the babies are being thrown out with the bathwater.”

He added that at some point opportunities will start to emerge, either at the market-wide level because of a sell-off, or in specific sectors which are getting sold off at different times.

The manager highlighted 2015 and 2016 where emerging markets and commodity names performed well, during which time he was able to allocate more to oil stocks and cyclicals.

“Whatever area of the market is providing opportunities we want to be on the front foot and providing lots of capital when appropriate,” he said.

Leyland’s JOHCM Global Opportunities fund has been one of the best performers in the IA Global sector over five years, returning 111.35 per cent, as the below chart shows.

Performance of indices since the start of 2016

 

Source: FE Analytics

The fund has a clean ongoing charges figure (OCF) of 0.84 per cent.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

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.