Glaring regional opportunities of recent years have largely passed as markets are pricing in most events, according to Artemis’s Jacob de Tusch-Lec.
A key – and beneficial – position in his £953m Global Income fund since 2012, Italian and Spanish utilities, are now less than 1 per cent of the portfolio, for example.
“In 2012, the sector faced risks in the shape of Robin Hood taxes, government expropriation and regulatory interference, but these were offset by undemanding valuations and dividend yields often twice the size of the companies’ price-earnings multiples,” added Mr de Tusch-Lec.
“Since then, bond yields have fallen sharply and as a result, bond proxies, such as utilities, have had a great time. Since [European Central Bank president] Mario Draghi’s promise that he would do ‘whatever it takes’ to save the euro in 2012, shares in southern European utility companies have increased by more than 60 per cent.”
But after such a rally, he said many of these stocks are no longer cheap.
“The days when you could buy a Spanish utility paying a 9 per cent dividend yield are long gone so, while the fund still holds a bit of Enagas (Spain) and Snam (Italy), it no longer owns EdP (the largest Portuguese utility) or Gas Natural (Spain),” added the manager.
Looking more broadly, Mr de Tusch-Lec said as the economy normalises and markets move away from a post-crisis world, macroeconomic considerations are taking a back seat to stock selection.
“At the start of 2014, our views on the macro picture were mainstream: we agreed with the consensus that US bond yields would go higher, the dollar would do better than the euro and markets would be volatile.
“None of these views have actually panned out, but we responded to the ‘pain trades’ in the first half of 2014 by minimising our exposure. We added some real estate investment trusts (Reits) as a hedge against lower yields and added to riskier names in emerging markets.
“While we responded to changes in the short-term macro environment, our medium-term views remain the same: US yields will eventually have to go higher as money starts leaving bonds and economic growth rebounds from the impact of the severe winter weather.”
Meanwhile, he also believes yield differentials between the US and Europe, both nominal and real, could widen as the ECB embarks on a form of quasi-quantitative easing.
“That will likely lead to a cyclical bull market in the dollar relative to the euro,” he said.
“It may seem puzzling it has not happened already, but capital has kept flowing into the eurozone as lower rates and unconventional policy attract portfolio investments,” added Mr de Tusch-Lec.
“With that in mind, we do not think this is the time to bet on recent trends continuing.
“We have started taking profits in some Reits and are once again positioning the fund to benefit from higher yields. Primarily, we have done this by building positions in US life insurer MetLife, which would benefit from higher yields and a higher dollar.”
What should investors do when the obvious chances have gone?
The view held by Artemis manager Jacob de Tusch-Lec (pictured) that ‘glaring’ opportunities to invest in markets have passed is arguably gaining traction with others as cash levels creep up.
Investors only have to look at the main asset classes to see good news everywhere. Stocks are up, bonds are rallying, gold is performing well and property is flying – or at least the retail flows into the sector are, based on recent IMA data.
This puts managers in a potential conundrum because they have to choose what to do with inflows into their funds. Do they buy more of something they like, even though they know they would usually want to buy it cheaper, or do they sit on cash, which in today’s interest-rate environment earns them squat.
Discretionary management firm Hawksmoor Investment Management has hiked the cash position in its portfolios in the face of current market levels.
Head of research Jim Wood-Smith said he was selling down some of the global equity income and “expensive” high-yield exposure on valuation grounds.
Investment Adviser has spoken to several multi-managers who said their underlying managers were becoming more defensive in anticipation of a market correction.
One of those was Aviva Investors’ Nick Samouilhan, who said he had been increasing the level of cash in his funds after selling out of high yield and halving corporate bond weightings, using some of the money to add to property and holding the rest in cash.
It seems an increasing number of managers is willing to bank profits and wait for prices to fall – for what reason is unclear.
