Newton’s Iain Stewart has piled up “elevated” levels of cash in his Real Return fund in the face of a volatile and deflationary outlook.
The multi-asset manager said the 24 per cent cash level currently held in the fund was at the high end historically and was down to the team “having difficulty finding things that we think look attractive”.
Mr Stewart said he was “concerned about the potential returns in the main asset classes”, but was also unimpressed by opportunities in alternatives, leaving cash as his only option.
However, he said he expected volatility to hit the markets at some point and he had a wish list of assets he wanted to buy into if valuations fell.
“We do expect volatility, which we have not yet had in equities, and we expect that volatility to throw up opportunities,” he said.
The manager has been trimming positions within both equities and bonds to raise his cash level, taking money where assets had reached valuations he was no longer comfortable with.
He has decreased his direct equity exposure from nearly 60 per cent of the fund at the start of this year to almost 50 per cent, particularly reducing his weighting to healthcare stocks from 17 per cent to 9 per cent.
“Those stocks had been out of favour but performed pretty well, and valuations are now up with events,” he added.
Mr Stewart said he had also trimmed the fund’s exposure to government bonds, particularly in the US, but said he was keen to get back into the asset class if it sold off further. This was because of his belief in the long-term outlook being deflationary, which would be positive for bonds.
While some commentators had insisted the current low inflation in the developed world should begin to reverse as the oil price fall dropped out of the figures, Mr Stewart said disinflationary forces were more widespread than generally believed.
He pointed to the disinflationary effect of globalisation, disruption in prices brought on by technological innovation and the drag on inflation caused by huge debt piles as some of the many issues likely to weigh on prices.
Given his view that there was likely to be further downward pressure on prices, Mr Stewart said it was “just as likely there will be more stimulus as higher interest rates”.
The central banks in the US and UK have listed low inflation as one of the primary reasons why they have yet to raise their base interest rates from the record low levels.
And Mr Stewart said further downward pressure on prices might mean they abandoned such plans altogether, and could embark on further rounds of “quantitative easing” and “print in a more significant way if the future was more deflationary”.
But the manager said such actions could have devastating consequences for markets, as investors might begin to lose faith in central banks and the ability of quantitative easing to make a positive difference, which could lead to sharp sell-offs and heightened volatility.
