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Miton’s Jane on the ‘most hated bull market in history’

17 August 2017

David Jane, manager of Miton’s multi-asset fund range, examines the impact of central bank policy on the market and what investors should be aware of as the current cycle enters its latter stages.

By Rob Langston,

News editor, FE Trustnet

With the market cycle moving into its latter stages, Miton Asset Management’s David Jane has warned that investors should be aware of what a shifting investment environment could mean for risk assets.

Jane (pictured), who heads up Miton’s multi-asset fund range, said the current cycle has been described by others as the ‘most hated bull market in history’.

Indeed, markets have continued to climb higher in recent years, prompting concerns over valuations.

Performance of FTSE 100 vs S&P 500 over 5yrs



Source: FE Analytics

But the manager said the main cause of negative sentiment towards the bull market has been central bank policy, which many consider have led to the revaluation of risk assets.

He said: “The principal reason why the bears have been negative mostly stems from a disagreement with central banks’ quantitative easing and negative interest rate policy programmes.

“These have caused interest rates to become very low in both absolute and real terms, which in turn has led to the revaluation of all risk asset classes, to a lesser or greater degree.

“Whether you consider it the right policy or not seems irrelevant: it’s that the policy and the effect of the policy was predictable.”

Jane said any move by central banks to change policy through the withdrawal of quantitative easing programmes or by raising interest rates would lead to “very different” valuations in the future.

However, the multi-asset manager noted that central bankers were “extremely wary” of making changes due to the potentially “destabilising” effect it would have.

“At present, US policy makers, while further advanced in their tightening cycle, have little reason to become aggressive and rates remain accommodating,” he explained.

“Therefore, it doesn’t appear that the interest rate cycle is about to end the bull market just yet.”

However, Jane said it has become “increasingly evident” that this cycle is in its “highly optimistic” latter stages, where “investors make decisions which they ultimately come to regret”.


“There are numerous examples in the euro-denominated bond markets where negative government yields have led to high yield bonds with absurdly low yields,” he said.

“Investors seem happy to accept a measly return right now in exchange for accepting the risk which in a bond is all to the downside.”

Jane added: “It isn’t just European high yield where investors are sowing the seeds of future disappointment.

“More and more bond issues are being launched with weak or no covenants to protect investors, and PIK [payment-in-kind] bonds have made a reappearance.

“These bonds typically pay interest with more bonds, as the company is too stretched to actually pay cash interest, despite incredibly low interest rates.”

The manager highlighted two other bond issues by Tesla and Netflix – companies they have held in the equities portfolio in the past – as examples of the changing nature of the bond market.

Jane said the two firms were “excellent growth stories with huge potential” but bondholders were unlikely to benefit from that, gaining exposure only to the downside if the companies fail to succeed.

“Both these companies have never generated a cent of cash flow to pay the interest on their bonds, it has to be paid from future bond and equity capital issuance,” he said.

“Let’s just hope conditions remain as favourable as they have been recently or they will have to make profits to pay their interest.”

Jane said a number of recent equity issues had also shown that the markets has been “a little too willing to finance businesses on hope rather than substance”.

He said: “Snapchat’s IPO is a good example, now trading at less than half the price it achieved in its first week on the market, as competing with the incumbent tech giants has proven harder than expected.

“Another example of excess could be Softbank’s huge fund raising to make technology investments. History will judge how successful a Japanese mobile phone company will be at running a $93bn technology fund, but the fee structure alone should have waved a red flag for investors.

“Having made a fortune from its investment in Alibaba, investors must believe the company has the golden touch and are prepared to accept a very disadvantageous fee structure – in which outside investors provide the leverage which the manager benefits from.”


The manager said in this environment the team have focused on liquidity in case market conditions change.

He said: “Illiquid situations with material downside risk are a particular source of concern, hence we are getting more conscious of our position sizes”

Jane added: “We would not seek to call the top of the market as this phase can persist for several years, particularly as monetary policy, although tightening, remains highly accommodative.

“However, experience guides us to be alert to the potential errors that we might come to regret in the future and avoid situations, which when conditions do change, could go very wrong.

“It’s the decisions we make now which will determine not only how we do near term, but importantly how we fare when the market does ultimately turn.”

 

Jane oversees the £426.6m five FE Crown-rated CF Miton Cautious Multi Asset and £77m CF Miton Defensive Multi Asset funds alongside Anthony Rayner.

The CF Miton Cautious Multi Asset fund aims to provide long-term capital growth by investing a range of assets.

Over three years, the fund has returned 28.67 per cent compared with a 20.49 per cent gain for the average IA Mixed Investment 20-60% Shares sector fund, as the below chart shows.

Performance of fund vs sector over 3yrs

Source: FE Analytics

It has an ongoing charges figure (OCF) of 0.82 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.