A rebalancing between growth and value has been the main focus of BMO Global Asset Management’s Paul Niven when working his F&C Investment Trust through 2021 so far.
Coming into the new year, Niven had already begun a programme of reducing the trust’s growth exposure and increasing its value allocation following the market’s shift into value in early November.
This continued into the opening quarter, where “very early in 2021 was another further cut to US growth stocks and a rise in exposure to value”, Niven said.
The £4.5bn trust has a large-cap bias and invests in a mix of defensive, cyclical and sensitive areas of the market.
F&C Investment Trust has been managed by Niven since 2014, although it has a long history before this as the world’s first investment trust. It invests in global equities and is also able to invest in unlisted securities and private equity.
At the end of 2020, the trust’s allocations stood at around 25 per cent in the T Rowe Price US Growth strategy (“an unusually high proportion”, Niven said) and just 13-14 per cent in the Barrow Hanley fund, the trust’s main value allocation.
Currently the growth and value allocation are almost level, at just below 20 per cent each.
There were several reasons for this, Niven said, including the narrowing of growth and value stocks valuations, very strong growth expected in the US and global economy, bond yields moving higher and an overall broadening of the market performance from just the cluster of lockdown ‘winners’.
“So really, the changes that we've made this year have become much more balanced in terms of exposure between growth and value,” Niven said.
All of this was informed by the manager’s overall macro outlook, which he explained was a generally bullish on developed markets’ recovery.
Back in 2020, Niven was projecting a short, rapid recovery from the financial losses of Covid-19, a recovery he still thinks will continue to be particularly strong in the US and UK.
Focusing on the US, he expects it to lead the developed markets in terms of growth during the recovery trade and period.
“I think [the] consensus is now expecting something north of 6 per cent into the US growth this year, it could well be that when 2021 is done that it ends up being something north of seven, maybe closer to even 8 per cent.
“So it's going to be a really strong year in growth terms,” he said.
On the UK, the manager said that the “economy here is set to surge, could be broad based”, supported by a strong housing market and manufacturing and services sectors showing a “very, very robust upturn”.
“It's going to be a real strong recovery in the UK in our view, following a very [significant] contraction in 2020,” Niven said.
Still, a strong recovery outlook was somewhat contingent on the ongoing vaccine rollout and a lack of new variants.
“The rapid deployment of vaccines, in our view, and markets view should defeat Covid,” Niven (picturedi) said.
These strong growth expectations are centred on two main reasons: stronger fiscal stimulus and increased consumer savings.
“Last March, we started discussing fiscal packages, which are really beyond anything that any of us had ever seen before in terms of sheer scale,” Niven said.
These massive doses of fiscal stimulus, supplied by governments at rapid pace at the outbreak of Covid-19 to offset some of the financial and economic impact of the pandemic, are a key contributor to strong growth in the UK and US, according to Niven.
The sizeable fiscal packages contributed to the second factor, increased consumer savings, or the “Covid piggy bank”.
In the US it’s estimated that savings as a proportion of disposable income is now around 20 per cent and in the UK around 17-19 per cent.
When these pent-up savings are spent, however, is more of a debate, but Niven feels that “consumers are likely to only start spending when they've got confidence and a lot spending depends on mobility. So vaccinations really do matter here”.
“You can think of these savings as representing pent-up demand, and basic successful vaccine deployment will be a catalyst for consumers to spend,” he continued.
Niven added that Europe has had a lower rate of savings so less pent-up demand and a smaller catalyst.
“But [the] important point, and to repeat what I said earlier on, in the US it is likely that certainly before the by the fourth quarter, we will have recovered lost output,” he said.
“And that's a significant milestone. I think that people had not expected that six or 12 months ago.”
Although bullish on the developed market recovery, Niven did highlight the concerns around rising inflation, which ironically are being supported by the factors encouraging a strong recovery.
Inflation has been rising for several months with investors pricing in higher levels.
In the latest data from the US Labor Department found that US inflation increased by 5 per cent in the 12 months through May, making it the largest yearly increase since August 2008.
This week the Office for National Statistics (ONS) in the UK found that inflation had increased 2.1 per cent, above the Bank of England’s 2 per cent target.
“It looks certainly unambiguous and this is coming through in the data. We can see cyclically we're going to see higher inflation and markets have priced this in. The question really is whether we're going to see a secular change in the inflation outlook,” Niven said.
“Now, I don't think you have to argue for a return to the 1970s to expect some general rise in inflation. This is not likely to be a period of rampant price rises. But I think and I've said this before, that we're going to be in for a long period of negative real yields.
“Real interest rates in terms of government bonds are negative, inflation is higher than nominal bonds.”
“This really fits with priorities for governments and central banks,” Niven added, as they have a have an extreme amount of debt on their balance sheets, increased by the fiscal Covid spending. To eliminate this the manager doesn’t think taxes will be increased because “[they] don't want to kill the recovery at the time you want to grow your way out of it”.
“A fair bit of inflation and negative real yields really helps to reduce the stock of debt over the long run,” he said.
One of the key things occurring in the macro picture is a shift in the “strategic backdrop”, meaning that the response from policy makers is now different to what it was pre-pandemic.
“They need to allow economies and inflation to run a little bit hotter than may have been the case if you compared to the previous, not only years but very recent decades,” he said.
Over 10 years the F&C Investment Trust has made a total return of 238.04 per cent, outperforming both its sector and benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust currently has 9 per cent gearing with the 1.4 per cent dividend yield. It is running at a 5.9 per cent discount and with charges of 0.52 per cent.