GAM’s Andrew Green has begun tilting his £185.4m UK Diversified fund towards large-cap stocks, which he believes will better protect him in the sell-off he fears will happen in UK equities.
The veteran manager said that “enthusiasm has run ahead of events” in terms of expectations for both the UK economy and for the equity market.
He said that investors were also assuming an optimistic rate of recovery in the UK economy, which he believed would have to be “trimmed back” when reality sets in and will prove to be a negative for markets that have “got ahead of themselves”.
Since the start of 2013, the FTSE 100 has risen by 13.8 per cent, while the S&P 500 index has risen by 23.5 per cent, but the rise in the index has yet to be matched by a corresponding rise in company earnings.
Mr Green said the fact markets were left broadly unaffected by the government shutdown in the US and the prospect of a default in the world’s largest economy “implies that people are very bullish”.
“A sell-off is possible because markets are ahead of themselves,” he said.
In response to the over-optimism he said he saw in the market, Mr Green said he had been selling out of small- and mid-cap companies and concentrating more on large caps, which are both better at weathering a downturn and also appear to be better value than small and mid caps.
Smaller and mid-cap stocks have outperformed their larger peers for roughly 15 years, Mr Green said, with only a slight break during the financial crisis in 2008 and he thinks that “most of the value has been squeezed out” of the stocks now.
Mr Green fears that smaller equities could be exposed when monetary policy gets tightened in the next few years, as they have benefited the most from the increased liquidity provided by quantitative easing and record low interest rates.
The manager’s cautious view on the UK economy is also based on the inevitable rise in interest rates, the effects of which he feels are being underestimated by investors.
In his bid to get more large cap stocks into the portfolio, Mr Green earlier this year bought into telecoms giant Vodafone, which is currently the fourth biggest holding in the fund, with a weighting of 3.7 per cent.
The manager’s bearish nature is also reflected in his cash position, as the UK Diversified fund currently has 16.6 per cent of its assets in money market funds.
Mr Green also manages global equities for GAM and was dropped by St James’s Place from running the SJP International Equity fund in November 2012.
However, Mr Green said he was revelling in the freedom of not having to manage the large amount of money that he had when he was on the SJP mandate as well as the GAM funds.
He said he felt he “could not move” with the SJP fund, saying “there are all sorts of issues being too big”.