The research analyst and deputy manager of the Rathbone Multi Asset Enhanced Growth Portfolio says the multi-manager team has cut back on its exposure to defensive funds in recent weeks in favour of more cyclically focused portfolios. "It is very obvious to me at the moment that there is a massive valuation dispersion between stocks with a high Beta and stocks deemed to be safe," she commented.
"The equity income funds are so consensual in 'safe haven' stocks that we’re beginning to believe they’re no longer as safe as they once were."
"If global growth drags badly, are investors more likely to sell cheap Beta stocks or expensive dividend-paying stocks? It’s hard to say, but we’re worried they will look to sell the safe stuff that’s trading on a premium."
One area that Shah is particularly wary of is the consumer sector in Asia, where it is the norm for stocks to be trading on a price-to-earnings (P/E) ratio of 25 times. She points to Nestle India, which is currently trading on 51.6 times P/E, as particularly expensive.
"We’re always looking at which areas have the most downside risk – if I was asked to choose between cyclicals and consumers [in Asia] now, it would have to be consumers," she said.
"We’re seeing a similar thing in both developed and emerging markets, which is one of the reasons why we’ve cut back on our exposure to Morgan Stanley Global Brands."
Rathbones' multi-manager team, which is headed up by FE Alpha Manager David Coombs, has also trimmed its position in Neil Woodford’s Edinburgh Investment Trust in the last few weeks.
"It’s not that we think these funds will now underperform – we’re just very valuation-focused, and given that we have volatility targets we can’t afford to be invested in funds that are at risk of significant drawdown," she explained.
Performance of indices in 2012
Source: FE Analytics
"If you look at the S&P 500 which has rallied of late, it’s the S&P 100 – the mega cap stocks – that have driven performance. These stocks are now even bigger parts of the index, and I just don’t think the earnings are there to support this run."
"[A correction] could happen in 12 months, or even longer, but as I said, we’re driven by valuations."
One of the funds Shah has looked to add exposure to as a result of her increasingly cyclical focus is Kiltearn Global Values, which is headed up by Murdo Murchison – formerly manager of the $50bn-plus Templeton Global Growth fund.
"The fund’s price to book is 0.9 times, it is yielding 4 per cent and has a P/E ratio of 12 per cent which, compared with the MSCI AC World, is pretty good," she said.
Although it is an income-focused fund, Shah has also expressed interest in the Pimco Global Dividend portfolio, which has recently cut back on its exposure to consistent earners in favour of basic value stocks and emerging franchises.
Shah’s Rathbone Multi Asset Enhanced Growth Portfolio was only launched in August last year, but has had a relatively decent start, losing 2 percentage points less than its composite benchmark – split 70/30 between the MSCI World and MSCI Emerging Markets index.
Rathbones’ other two multi-asset funds – the Total Return and Strategic Growth portfolios – have returned 31.38 and 27.91 per cent since their launch in June 2009.
All three funds have a minimum investment of £1,000, but are on the expensive side, with total expense ratios ranging between 2.31 and 3 per cent.