Within equities, being underweight the US, overweight Japan and neutral the UK are three key positions BMO Global Asset Management’s multi-manager team is taking within its portfolios.
However, investment manager Anthony Willis said there are still active managers the team is willing to back regardless of which region they operate in.
Looking ahead, he said that these positions are unlikely to change much in the short term as “the themes that have dominated the first half of the year show no signs of abating in the second half of 2018”.
So far in 2018, economic data has generally been strong, and although some areas are likely to cool off to some extent, the US should continue to power ahead thanks to the stimulative impact of president Donald Trump’s tax policies.
Meanwhile, political noise will continue to serve as a distraction, with increased political risks related to the rise in populism across Europe, and the UK showing few signs of reaching a deal with the European Union over Brexit.
“Overall, we would describe our positioning as relatively cautious – whilst we have seen volatility pick up this year, it would be surprising if we did not see further risk-off episodes at some point before the end of the year,” Willis said.
“The economics still look reasonable and central banks for now remain accommodative, but we don’t have a great deal of conviction that markets can make a great deal of progress in the short term.”
He added: “On this basis, we are happy to position the portfolios conservatively and let our stockpicking managers get on with the job of finding decent opportunities in their portfolios.”
Below, he outlines where the team has positioned its equity exposure accordingly and where it is overweight, underweight or neutral.
Overweight
The area the team is most bullish on is Japan, where it sees structural benefits from prime minister Shinzo Abe’s reforms.
Willis said: “Our asset allocation has seen limited shifts over the first half of the year and we do not foresee any significant shifts in the near term.
“We continue to be overweight Japan, where Abe’s popularity appears to be on the rise once again, and domestic reforms will bear fruit over time, though inflation may prove elusive for the Bank of Japan for some time yet.”
Abe and his ambitious ‘Abenomics’ – the eponymous programme of economic reforms – have seen companies paying higher dividends than before and appointing more non-executive directors to boardrooms, among other shareholder-friendly developments.
Within Japan, the BMO multi-manager team’s top pick is the Schroder ISF Japanese Opportunities fund run by Ken Maeda.
The fund has been a top long-term performer, returning 183.83 per cent over the last decade, and is in the top two quartiles over one, three, five and 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“Based in Tokyo, Ken is the head of the Schroders Japanese equities team of which Andrew Rose, whose name should be familiar to many UK based investors, is a member,” Willis said.
“This is very much a bottom-up stockpicking fund and takes a multi-cap approach. Ken seeks to invest in out-of-favour stocks where he sees an attractive intrinsic value in a company that has been overlooked by the wider market.”
The fund has a clean ongoing charges figure (OCF) of 1.3 per cent.
Neutral
A region the team is more neutral on is the UK, which has both positive and negative factors surrounding it.
While Brexit concerns and a weaker economy compared with the rest of the world are disappointments, that the market has also underperformed means it has become more divergent.
“We are neutral on both the UK and Europe. The UK political and economic backdrop is uninspiring at best, but there appear to be plenty of opportunities at the stock level and any further weakness in sterling is beneficial for many companies,” he said.
Within the UK, one name the team holds in high regard is the five FE Crown-rated Old Mutual UK Dynamic Equity fund, managed by FE Alpha Manager Luke Kerr.
The investment manager said: “This fund is biased towards small- and mid-cap investments and also has the ability to take short positions. It has produced strong returns in different market environments, a clear attraction given the uncertain outlook for the moment in the UK.”
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Since its launch in 2009, the fund has returned 427.1 per cent to investors, making it the second-best performer in the IA UK All Companies sector.
Benchmarked against the FTSE 250 ex ITs, the fund is most weighted to industrials and consumer services companies, while least weighted to miners and technology.
The concentrated portfolio of 49 stocks also has the ability to take short positions where appropriate and currently has two such bets in place.
Old Mutual UK Dynamic Equity has an OCF of 1.07 per cent.
Underweight
The area the investment manager is most underweight in is the US, where the risks appear to outweigh the potential returns from here.
“We are slightly underweight the US – the economic backdrop is good but it does seem a lot of the good news is already priced in given market levels,” Willis said.
The S&P 500 has risen 149.75 per cent over the last decade and although it has not hit a record high for some 159 days, it remains at high levels relative to history.
Although underweight the region, Willis said there are still good funds that can exploit opportunities for stockpicking managers.
“An example in the US would be Artemis US Extended Alpha, managed by Stephen Moore. His ability to pick stocks and the flexibility of the mandate to allow him to hold short positions in companies gives us a lot of comfort when US indices are close to record highs,” Willis said.
The four crown-rated fund has returned 60.84 per cent since launch in 2014, more than its average peer in the IA North America sector and the notoriously difficult-to-beat S&P 500 index.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund currently has 22.5 per cent of assets invested in technology, 15.2 per cent in industrials and 14.6 per cent in consumer discretionary companies.
Like the above UK fund, FE Alpha Manager Moore has the ability to short, with such positions accounting for a net 26.5 per cent of the fund. Artemis US Extended Alpha has an OCF of 0.82 per cent.