Where do multi-managers see opportunity in the market?

Liquidity pumped into the market by central banks has kept government bond yields artificially low.

Peter Fitzgerald, co-head of the six-strong multi-manager team at Aviva which manages more than £3bn in client portfolios, says that in the present environment he is seeing little value across the whole of the fixed income spectrum, as bonds have become increasingly expensive.

“The objective is to lose as little money as possible for investors and in a reasonable time horizon it’s easy to lose money in fixed income,” he said.

“Government bond yields are below inflation so in real terms you are going to lose money, while US high yield bonds are at five per cent, which is not really high yield.”

The manager also said he doesn’t see much value in absolute return bonds as “after fees it’s hard to make returns”.

But Mr Fitzgerald does have 4.9 per cent of the of the multi-manager 20-60% fund allocated to Stuart Cowley’s Old Mutual Strategic Bond fund.

“It’s possible to identify some very good managers, but as a group it’s very unattractive since interest rates have fallen so much,” he said.

“It’s incredibly difficult to predict stock market returns by what is happening in the economy. If you are willing to take risk within equities it is a more attractive opportunity set than fixed income.”

Within equities, the portfolio is geared towards emerging Europe, which Mr Fitzgerald said was the cheapest market in the world based on valuations.

He added that although dominant country, Russia, has problems with corruption and corporate governance. The low price to earnings ratio of Russian stocks meant they deserved their place within a well diversified portfolio, and as Gazprom is trading at around 2.5 times earnings, it’s “priced for a lot of disappointment” .

Scott Spencer, Aberdeen Asset Management

Like Mr Fitzgerald, Scott Spencer, senior portfolio manager on Aberdeen Asset Management’s multi-manager range, currently prefers equities to fixed income.

He has sold down his investment-grade bonds, while he has no exposure to government bonds at all. But he said in the Aberdeen multi-manager portfolios there was a place for fixed income managers who can be strategic.

“It’s about manager selection. Legal & General Dynamic Bond fund and Schroder Strategic Bond fund can exploit opportunities as they see fit, whether in the government market or the credit market. Bond managers are very close to their market and should be able to be tactical.”

But he added that Aberdeen were “more interested in bottom up stock picking given where the market is.”

Defensive companies, which are less affected by trends and investor sentiment, have dominated a six month long rally that has seen the FTSE break the 6,000 mark for the first time since 2007. This has led to high quality names in the pharmaceutical. utilities and consumer services sector becoming increasingly expensive.

“After the Italian elections, defensive names led the market higher but lots of managers we are seeing say there are still lots of opportunities at a stock level,” the manager said, adding that this was now more of a stockpickers market and would probably remain so for the next 12 months or more.

Mr Spencer has the US, Asia and Japan as the three regional overweights in the portfolio.

The multi-manager team have recently bought into the BlackRock US growth fund, which has had high-performing ex-UBS manager Lawrence Kemp at the helm since December.

“There are some potholes within the US market. It looks quite expensive but if you find the right stock picker that will drive returns,” Mr Spencer said.

Olivia Mayell, JPMorgan

JPMorgan’s Olivia Mayell runs the client portfolio management team in global multi-asset, which has an internal fund-of-funds structure, and manages the firm’s multi-asset income fund. She too has a bias towards equities, but says the reason she has sold out of high yield bonds is that they have already done so well.

“We’ve been really happy with the yields but we’ve seen those contract so we’ve taken some profit,” she said.

High yield has become less of an attractive prospect to investors as they no longer offer double digit returns. Researchers Gustavo Tella, Claudia Holm and Kateryna Lipatova at S&P Capital found that in the year to January, European Investment Grade Corporate Debt fell from 11 per cent to 5 per cent, while probabilities of default doubled.

The fund had 55 per cent in high yield bonds in 2009, when the manager took advantage of “people dumping bonds at any price”. Ms Mayell said they have since been a source of good performance but has clipped the coupon more recently as high yield valuations looked stretched.

Ms Mayell has just completed a formal allocation process for the portfolio and now has a higher conviction portfolio with increased risk.

The manager said the idea that for bond investors “the type of yield we have had in the last five years is probably gone”.

But she said that in recognition of this, investors were prepared to look further afield for income, and to take on more rise. In regional terms, the portfolio has a bias and a bias towards developed market equities.

She said that managers were struggling to find value in emerging markets but had moved out of hard currency into local currency to partially counteract this.