A move by Talib Sheikh’s Multi-Asset Income fund to raise equity exposure to its highest ever weighting has caused “soul-searching” in the wake of recent market turbulence.
Mr Sheikh, who runs the £329.6m fund with Michael Schoenhaut for JPMorgan Asset Management, said he had recently increased his exposure to European equities, which meant his overall equity exposure hit a historic high for the fund at 42 per cent.
Equity markets have whipsawed in recent weeks, with the FTSE 100 experiencing a technical correction in October, while the MSCI World index fell more than 6 per cent from the end of September to October 16 and has yet to fully recover its losses. The MSCI AC Europe index suffered heavier falls and is even further away from regaining them.
Mr Sheikh said he was comfortable with the allocation, though, because of the valuations European stocks sat at.
“The trade [into European equities] has suffered some volatility and some soul-searching within the team in the past few months but we are happy to run it because of valuations,” he said.
“I can build a portfolio of European equities with a dividend yield of 5 per cent with stocks which are trading on a price-to-earnings ratio of 13x.”
The manager said he was able to use internal fund managers to run “segregated mandates” for him and, with the European equities investment, had enlisted European equities chief investment officer Michael Barakos.
He said Mr Barakos runs the mandate using the group’s behavioural finance process and, while there were investments in typical income stocks such as utilities and telcos, Mr Barakos was able to stray outside of these.
According to Mr Sheikh, his colleague has been able to target some financials and businesses with the “potential for dividend yield increases”.
Mr Sheikh has also increased his exposure to global equities, with the funding for both trades coming from a reduction in fixed income.
He said his weighting to fixed income was now 41 per cent as opposed to 50 per cent historically. This was mostly comprised of emerging market debt, US high yield and some convertible bonds.
Mr Sheikh has sold down his exposure to European fixed income, which previously included high yield and some exposure to Spanish, Italian and Portuguese government bonds. “These changed from being a yielding asset to not being,” he said.
He acknowledged he was “giving up yield” by selling fixed income securities that yield 6.5 per cent and buying global equities, which yield 3.2 per cent, and European equities, which yield 5 per cent.
“But I am prepared to forego some yield to get cyclicality into the portfolio,” he said. “I think the portfolio will do well in a rising rate environment.”
Mr Sheikh said he thought the recent drop in markets came because investors were a “bit over-optimistic” and also because they expected the European Central Bank (ECB) to enact ‘conventional’ quantitative easing – the purchase of government bonds.
The manager said the potential for the ECB to buy government bonds was a “credible backstop” but added that the body would want to wait to see how other measures impacted the economy, such as its programme of targeted loans.
If bank lending improved alongside economic data in countries such as Germany, this would be “positive”, he said. “There might not be a huge rally, but it will give stability.”
