Armstrong shorts US small caps
Armstrong Investment Management’s Patrick Armstrong is shorting US small caps, saying they now look expensive.
Mr Armstrong – who runs the funds with his wife Ana Cukic Armstrong – is shorting the Russell 200 index as part of an overall defensive strategy that includes a 30 per cent cash weighting.
He said: “The Russell 2000 index is trading at a premium multiple to large caps which means it is expensive and it doesn’t yield as much.
“It is a rotation which will happen, as small caps have gone up 150 per cent from their lows while large caps have only gone up 60 per cent.”
The manager formerly headed the multi-asset funds at Insight when it was Hbos’ asset manager.
Mr Armstrong said: “Investors will be looking for more defensive sectors soon.
“We are two years into a rally and a rotation happens at this point, which sees people moving from cyclicals to defensive stocks such as healthcare, utilities and telcos, for instance.
“These perform in the second stage of a recovery.”
The manager said share buybacks within the telecoms sector could provide a boost.
He said: “Companies like Telefonica have a 9 per cent dividend yield but can issue a bond at 4 per cent.
“Companies which have high dividends and can issue debt cheaply will issue bonds to buy back shares.
“Cisco Systems is doing this too and it will be an ongoing theme.
“The benefit of exposure to such stocks is you get the dividend while you are waiting for the buybacks.”
The manager has adopted a high cash weighting of 29.8 per cent of the portfolio in cash or currency, and said opportunities were being assessed, including in Japan and currency trades.
Elsewhere, his alternatives exposure is focused on dividend futures in the Euro Stoxx 50 index, as the manager said while the market was forecasting dividends to fall for the next five years, he did not expect this to happen.
His other alternatives exposure is through a 5.3 per cent position in the Baring Absolute Return Global Bond trust and a 2.2 per cent position in F&C Active Return.
The £22.7m IM Distinction Diversified Real Return fund has delivered a top-decile return of 10.9 per cent over one year to March 7, compared with the IMA Cautious Managed sector’s 7.2 per cent, according to Morningstar.
