Multi-managerJun 22 2017

Has 2017 growth fund rally come to an end?

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Has 2017 growth fund rally come to an end?
Charles Stanley has switched from US technology stocks to financials

Charles Stanley’s multi-asset team has been tilting its portfolios towards value investments after recent months in which the style was “massively outperformed” by growth assets.

After several years of outperformance by growth investment styles, there was a resurgence of value investing in 2016, but that has quickly reversed in 2017. Value assets have lagged their growth counterparts in the year to date.

Given this dynamic, Charles Stanley multi-asset manager Pierre Micallef has backed value to return to favour as global growth continues to pick up.

Mr Micallef said the Charles Stanley multi-asset team had adjusted its portfolios in recent months to “tilt” them towards value styles. These moves included selling the iShares Nasdaq ETF in favour of an iShares S&P 500 Financials ETF, and selling the iShares MSCI Japan ETF in favour of the value-oriented £1.8bn Man GLG Japan CoreAlpha fund.

Mr Micallef said: “Growth has massively outperformed value year-to-date. When it gets to such extremes we think it is better to tilt the portfolio away from those extremes.”

Mr Micallef said Charles Stanley’s central macroeconomic scenario was that global growth should continue to pick up moderately, which should be a favourable tailwind to allowing currently underperforming value areas of stockmarkets to rise strongly.

The shift in the portfolios has been encapsulated by the switch from US technology into US financials.

Charles Stanley had been invested in US technology stocks through the iShares vehicle, but Mr Micallef said his team had begun to have concerns about the valuations on tech stocks, thinking it was time to take profits. The team then recycled that money into US financial stocks, which have underperformed so far this year.

Mr Micallef said the sector now had a “clear value tilt” and should outperform if Charles Stanley’s central case of improving economic growth proved correct.

The value tilt, and preference towards financials as a store of value, was also reflected in the purchase of Stephen Harker’s Man GLG Japan CoreAlpha fund. The largest sector overweight in the Man GLG fund is banking stocks, in which the fund has a 13 percentage point overweight position relative to the underlying Topix index, according to the fund’s latest update.

Within its central case that there should be moderate improvements in global growth this year, the Charles Stanley team expects emerging markets to lead the way, as declining inflation will let central bankers boost economic growth with looser monetary policy.

Mr Micallef said the region likely to be the biggest beneficiary of the macroeconomic environment was Asia ex Japan.

He said: “The world is seeing improved growth momentum and this benefits Asia ex Japan.

“We think earnings are likely to grow in the high teens and forward valuations are around average compared with the past 10 years, whereas other regions look on the high side in terms of valuations.”

Reflecting the bullish view on Asia ex Japan, the Charles Stanley multi-asset team has added to its holding in the £198m Schroder Asian Total Return investment trust, which Mr Micallef praised for its “asymmetric risk profile” and ability to protect against losses by using put options, futures contracts and other derivatives.