We've 'no idea' what QE will do, says cautious Mundy

Alastair Mundy, manager of the Investec Cautious Managed fund, a pick of Citywire Selection, says the recent bounce in markets doesn't mean we're out of the woods.

Remaining cautious on QE and Western debt levels

Stock markets may have risen this year, but the tentative signs of economic recovery do not mean the crisis facing the indebted west is over, warns fund manager Alastair Mundy.

The manager of the Investec Cautious Managed fund expressed concern about the impact of 'quantitative easing' (QE). This controversial policy has seen the Bank of England create £325 billion of new money in the past three years in a bid to prevent the UK falling into a depression after the credit crunch. The US Federal Reserve has adopted a similar policy although critics fear it could unleash higher inflation in both countries in the future.

‘We are still in the middle of the great financial experiment and we will only see the consequences once QE is withdrawn. We still have no idea what it will achieve at this point,’ he said.

In light of such concerns, Mundy has continued his more defensive stance, which is designed to protect against ongoing Western debt-reduction plans and the possible consequences of the West’s massive QE programme faltering.    

The £2 billion fund has more than 10% in Norwegian government bonds and almost the same amount in US treasuries, while around 4% is allocated to UK index-linked government bonds.

‘The temporary economic strength we have seen and a few good statistics have meant markets have gone up, and people think it is all over, but we still worry about the levels of debt,' he said.

Boosted by Japanese equities overweight

Mundy has however benefited from the rally in markets in recent months. His overweight in Japanese equities helped propel the fund to a 7% gain since the start of the year.

In the year to 12 March Mundy posted a return of 7.1%, almost keeping pace with a sharply rising FTSE All Share, and far exceeding the composite equities/bond benchmark's return of 1.3%.

Mundy has taken his Japanese equities allocation to its highest ever weighting at 9.2%. Current holdings in Japanese funds and direct Japanese equities have all been topped up.

Diversified holdings

The manager has taken a diversified approach to his exposure, with the CF Morant Wright and GLG Japan funds comprising 2.5% and 1.5% of the fund respectively, while direct stockpicks have been built through buying Japanese exporters such as Yamaha, Seiko and Konica Minolta.

‘The surge in Japanese equities has worked nicely for us,' Mundy said. 'They are up around 30% from their trough in recent months. We already have exposure to banks through GLG, and to mid- and small-caps through Morant Wright, so have added exporters ourselves to give us good diversification.’