Welcome to Morningstar. I'm Holly Black. With me is Jason Borbora-Sheen. He is Manager of the
Ninety One Diversified Income Fund. Hello. Hi, Holly.
So, Jason, we often ask managers for three stock picks, but you are here with three themes because
this is a multi-asset portfolio. So, you are not just about the stocks. So, what's our first theme?
Yeah. So, the first theme today, the lack of diversification within markets currently,
and that's something that if you look at a traditional multi-asset portfolio
equally weighted between bonds and equities, traditionally outside of
recession-induced bear markets in equities, had very few significant drawdowns and that changed
after the financial crisis we think because market structure also changed in terms of
greater use of passives, much lower bond yields and central bank intervention.
That's led to far more frequent bouts of volatility for traditional multi-asset investors
and a lot of that is to do with the less or lower degree of diversification coming from traditional
defensive bond markets. So, one combination of things we've used has been to reduce exposure via
futures, index futures that track the market, but then add back participation to the upside via call
options. And when volatility is low, the expense to the portfolio of doing that is far reduced,
and that's something we think that investors could consider in order to achieve better
diversification in their portfolios. Okay. And what is our second theme?
So, the second theme today would be the dividend style, and I think most people will be aware of
the reach for yield which has been ongoing really since the sort of 2008 crisis. Now,
that's left dividend equities looking really quite compelling, we think, on a valuation basis
relative to the market. So, relative P/Es and high dividend stocks to the market are now at
almost record levels of lowness, and we think that that could set up an environment where either
dividend equities outperform based on reopening and people's belief that dividends
will be reinstated, or simply because in a down market actually the stocks which have been less
popular tend to outperform. So, we think there's a number of ways in which dividend could win there.
A good example of this would, for example, be American Tower (AMT), which is a US REIT.
They operate pylons effectively or macro towers onto which mobile network operators place their
antennae, and it's a very high margin business. So, you pay up for the installation of the tower,
you have an anchor tenant, and when you add another tenant onto that,
your margins are in the sort of 90% range. And that means it's a very secure, compelling level
of income that you can achieve from those stocks. Okay. And what is our final theme for the day?
So, the final theme today, emerging market debt. What I think is interesting about this asset class
is that it's pretty, we think, misunderstood and overlooked often by investors, simply because
when they look at the volatility of the asset class, which seems very high, almost equity like,
they tend to disregard it as being too risky to own as a fixed income asset. Now the cause of
that volatility typically is currency exposure. It's the fact that when you buy emerging market
local currency debt, you typically take on the FX risk that comes from that bond. It's very
different though if you look at it on a currency hedged basis. And actually, emerging market debt
is one of the few fixed income markets whose relative yields to government bonds has not come
back to its pre-crisis lows and it's attractive on that valuation basis. So, we think that investors
should consider this within portfolios really as an alternative to other defensive market bonds.
An example of this would be Brazil 2025 Maturity Bond that on a currency hedged basis yields near
to 5%. You've got in Brazil a very low likelihood of ongoing or significant interest rate increases
simply because you have an economy which can't withstand that. And it's important to remember
that when you are investing in government debt markets, you are really looking for that sort
of goldilocks scenario where there's not a significant risk of a crisis in the country,
but there's equally not likely to be very strong economic growth that leads to interest
rate increases. You need that sort of slightly tepid mix of growth and inflation and debt.
Jason, thank you so much for your time. For Morningstar, I'm Holly Black.