Hello and welcome to the Morningstar Series, "Why Should I Invest With You?" I'm Emma Wall
and I'm joined today by Andrew Cole, Manager of the Pictet Multi Asset Portfolio Fund.
Hello. Hello. Good morning.
So, unlike a number of fund managers, who are single asset, who don't have much say
when their particular asset class looks overvalued or under threat, you have many levers to pull.
So, what are you thinking right now in terms of positioning as certain asset classes do
start to look quite toppy? Do they? Look we take the view that this has
been a long economic expansion. We think it's got probably quite a lot longer to run. So,
we want to be positively exposed to earnings growth. Valuations on our metrics are certainly
not cheap; fair value and we think we can source value within markets. Generally, means
that we have a bias towards equities. And have you seen yourselves taking some profits,
because as you say, although things may have further to run, they have come a considerable
way, when looking at equities. Cole: We've changed our orientation within
equities. We've wanted to become more cyclical. We've wanted to avoid what we would describe
as expensive, defensives. And we've been wary of perhaps typical cyclicals, such as emerging
markets, particularly, over this year, when we've seen a strengthening U.S. dollar and
rising interest rates. But by and large, we've been supportive of
technology, materials, energy and industrials. And when we think about defensives, where
might we want to be; healthcare. We certainly wanted to avoid things like consumer staples
and utilities. And what then about the other asset classes,
what about bonds? Because there are rising interest rates in the developed world and
EM has looked rather under pressure, not least because Turkey and Latin America seems to
be blowing up. Are there – again, it was much about what you were avoiding as a way
you're seeing opportunities? I think that's absolutely right. So, we've
been very mindful, particularly in a rising interest rate environment, what fixed income
exposure we've had. We have avoided emerging market debt, fortunately, and actually here
and now it starts to get interesting, so on our radar.
I think U.S. real yields and U.S. inflation linked bonds, with real yields of 1%, offer
pretty good long-term value. I mean, most U.K. pension funds would bite your arm off
for a 1% real yield. If there is an area that we do think is expensive, it is credit. We
think the credit, the corporate sector is increasingly leveraged and covenants are deteriorating,
spreads are low and that’s where we think investors aren’t getting the right risk
premia for the risks involved. Let's talk a little bit about correlation,
because investing 101 says that if you have half your money in equities and half your
money in bonds over the long terms they'll balance one another out.
There seems to be lot more correlation between equities and bonds since quantitative easing
particularly this year when you've seen geopolitical risks. So, for example emerging markets it
hasn’t just been equities or bonds that have come – have been in trouble. It's been
both. How do you blend that within the multi-asset portfolio?
Well I couldn’t agree with you more. A theory works until it doesn’t and then it doesn’t
and it kills you. Indeed, if you go back to the start of this year, the sharp sell-off
we saw in markets February, March was associated with falling bond prices as well.
So, actually diversification from that standard bond activity has proved pretty difficult
all year. And for an asset allocator as ourselves we have to think about how we might manage
risk in a different way. I mean, we actively seek to think about that. We want good effective
diversification or good effective risk management and this year quite clearly having government
bonds and equities hasn’t provided that. So, we have sort to manage risk in other ways,
the pricing of volatility which at the beginning of this year got to multi-year lows has allowed
us to use options for instance to manage that risk rather than relying on bonds to do the
job for us. So, it's being a little bit cleverer, a little
bit sort of outside the vanilla basket in order to protect investors.
Yeah, absolutely. I mean look the first thing that we want to do as multi-asset investors
is have more money invested in what we think is going to be the best performing asset.
Our second task is to think about risk management and how might the relationships between assets
change so that we get better diversification and this year has been a challenge I think
for most investors ourselves included on that front.
Andrew, thank you very much. Pleasure.
This is Emma Wall from Morningstar. Thank you for watching.