Investors need to have a full allocation to the US dollar at this point in the market cycle and should not rush into the emerging markets or Europe, according to Troy Asset Management’s James Harries. 
The manager of the Trojan Global Income fund said that the investment landscape had changed significantly and was very different to what is was a decade ago.
“Ten years ago we found lots of ideas in Asia and emerging markets and were trying to capture the growth in China at that point,” he said. “Fast forward to today and there is a very different backdrop.
“We are at the opposite end of that: we are worried about China and capital having flowed into emerging market debt in a way that we think is going to be problematic at some point.”
As such, the manager’s exposure to emerging markets in the £102m fund is just 3 per cent – principally in Singapore and Hong Kong – while he has a 54 per cent position in US equities.
“Fast forward to today and there is a very different backdrop. We are at the opposite end of that,” said Harries (pictured). “We are worried about China and capital having flowed into emerging market debt in a way that we think is going to be problematic at some point.
“We are relatively positive on the US dollar either because of the interest rate differential of the US Treasury market compared to other bond markets or because there may be a problem and people move into the US dollar when there is a problem.”
Performance of dollar vs euro over 3yrs
Source: FE Analytics
Yet, since the start of 2017 the dollar has weakened relative to the euro, as the above chart shows.
“I think you need to have a full dollar weighting at this point in the cycle,” said the Troy manager. “I think as the market completes its final updraft – if you want to view it in that way – and moves into a more difficult environment it is likely to coincide with a strong dollar.
“From a global context it will be a strong currency. Whether that is relative to sterling I am less sure but on a trade-weighted basis around the world I think that will be the case.”
Many commentators however have been concerned by the high valuations of the US market relative to other major equities indices.
“I think the US is a very attractive place to be investing at the moment,” said Harries. “A lot of people just see it as expensive relative to other markets but I think as a global investor you need to take currency into account and I think that we are well positioned for the way I see markets behaving.
“To simply underweight the US market because it is more expensive in aggregate to other markets not taking into account stock-specific ideas or the currency may not be ideal positioning.”
Performance of indices over 10yrs
Source: FE Analytics
While the US is considered a notoriously poor income-paying market, Harries said that there are opportunities for equity income managers in the US.
Indeed, his £102.2m fund has a 54 per cent weighting to US stocks and while issues such as a share buyback culture are correct, factors are shifting.
“It is true that the US has a culture of share buybacks and therefore in aggregate the yields tend to be somewhat lower,” Harries said.
“But it is not true that there aren’t plenty of ideas and companies that you can invest in that are also generating yield.
“I also think that things are changing somewhat. The demographic [of an ageing population] backdrop is global but is also hitting the US because the baby boomers are retiring and there is consequently a natural desire for income and companies are likely to serve that.”
A changing dividend culture, coupled with a weak dollar, means that investors should be paying particular attention to the asset class as the market cycle comes to an end.
“Putting all that together means that we think the US looks an attractive place to be investing today,” the Trojan Global Income fund manager said.
However, once the market has corrected, Harries said he will look to diversify the portfolio away from the US into more structurally interesting areas such as the emerging markets and Asia in particular.
“It will give the opportunity to offload some highly valued companies – which by then will be quite low yielding in a fully valued currency – and be able to buy a whole host of companies all around the world in inexpensive currencies,” he said.
“We would expect the portfolio to globalise in a sense of having more capital allocated to companies that have a higher exposure to Europe, Asia and emerging markets because my belief is that the opportunity set in those areas currently is relatively unattractive but will become more attractive in time.”
Harries added that Asia is notably an area he will look to add via directly-listed businesses or businesses listed elsewhere that have high exposure to the region.
“You can buy really good businesses in really cheap currencies with all of the structural attractions of emerging markets of younger populations, better demographics, richer middle classes and so on,” he said.
“That is all true but I would much rather allocate capital to those areas after a credit cycle than today.”
Harries has managed the Trojan Global Income fund since its launch in 2016 during which time it has underperformed the IA Global Equity Income sector by 5.66 percentage points in sterling terms.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Prior to joining Troy, he spent 10 years at Newton Asset Management running the Newton Global Income fund. Under his tenure the fund returned 104.39 per cent, almost double the sector peer’s 54.17 per cent.
The Trojan Global Income fund has a yield of 3.02 per cent and a clean ongoing charges figure (OCF) of 0.95 per cent.