Many industry experts have raised concerns that valuations in equities and bonds are at high levels and are therefore prone to a correction and, as FE Trustnet recently highlighted, there are a number of potential headwinds facing the current market.While Potter, manager of the £970m F&C MM Distribution fund, doesn’t disagree that valuations look stretched, he hasn’t been making any real changes to his portfolios because there is a growing realisation that the world’s central banks will continue to be very supportive.
“I don’t think that we are as bearish as a lot of people because the support which has underpinned the financial system, even it is false or artificial, is still there,” Potter (pictured) said.
“It means that the cycles in various asset classes could carry on for longer. I sense that there is a change in psyche among investors that, actually, rates might stay lower for longer so there has been a reinvigoration of the same factors that have driven the market over recent years, like the search for income.”
“On that basis, risk assets still look relatively cheap.”
The major reason why Potter is sanguine in his outlook for equities is because he doesn’t expect bond yields to spike; which many investors thought would happen in 2014.
Performance of indices in 2014
Source: FE Analytics
He says the performance of bonds this year has caught the large majority of managers out and it is only now that many are realising the likelihood of a full-blown catastrophe in the fixed income market isn’t an immediate concern.
“The world and his wife are suggesting that the bond market is expensive, but things can stay expensive for a long time,” he said.
“There is clearly a mind change going on because everyone was fearful of rising rates and there was abject pessimism that the bond market would move meaningfully lower. That might still happen, but there has been a change in perception of when.”
“Clearly there are still deflationary forces at work and growth isn’t that strong so it means the cycle could be elongated.”
The manager says peoples’ perceptions of rate rises are being pushed back and even if the Bank of England does begin tightening in January, the first interest rate hike is likely to be by such a small amount it will have little impact.
He also says that new Fed chairman Janet Yellen is unlikely to spook the market by unexpectedly pushing up rates in the US.
“Everything she does will be data dependent, but inflation is being well-behaved and we haven’t seen any wage growth, so there is no pressure for her to change her stance,” Potter said.
“Suddenly, people are starting to think that bonds could well stay at this level because there is no real reason why yields will rise.”
Because of that, Potter says he has been happily topping up his position in UK equities instead of raising cash like a number of his peers.
“The big topic is that you should be adding to the managers you have the highest conviction with,” he explained.
Four of the funds he has been adding to, which he has been a long-term supporter of, are Schroder UK Alpha Plus, Majedie UK Equity, Majedie UK Income and Ardevora UK Income.
The £1.9bn Schroder fund, which was formerly run by Richard Buxton but is now managed by Philip Matthews, and the five crown-rated Majedie UK Equity fund have been two of the best performing portfolios in the IMA UK All Companies sector.
According to FE Analytics, both portfolios have been top decile over 10 years and have comfortably beaten their FTSE All Share benchmark.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
An FE Trustnet article last week highlighted that the £2.7bn Majedie fund has been the most consistent portfolio in the sector as it has beaten the FTSE All Share in nine out of the last 10 calendar years.
FE Alpha Manager Chris Reid’s Majedie UK Income fund and Jeremy Lang’s Ardevora UK Income fund, which sit in the IMA UK Equity Income sector, have shorter track records as both were launched in 2011.
However, the two funds, which both invest across the FTSE 100 and FTSE 250, have comfortably outperformed the sector and index over that time.
Performance of funds vs sector and index since Dec 2011
Source: FE Analytics
Potter and Rob Burdett have managed the F&C MM Navigator range together since October 2007.
One of their best relative performers has been the four crown-rated F&C MM Navigator Distribution fund as our data shows it has been a top quartile performer in the IMA Mixed Investment 20%-60% sector over three and five year periods.
The managers currently hold around 56 per cent of their portfolio in UK, European, US, Japanese and specialist equities and the likes of Schroder Income Maximiser, Artemis Global Income and IFSL Harewood US Enhanced Income feature in their top 10 holdings.
They hold close to 40 per cent in bonds and non-correlated assets and the funds they use include GLG Global Strategic Bond, PFS TwentyFour Dynamic Bond and Darwin Leisure Property.
F&C MM Navigator Distribution has a yield of 4.4 per cent and its ongoing charges figure (OCF) is 1.53 per cent.
