Recent drawdowns of 10% in equity markets did not come as a surprise to James Barber, head of investments at Epoch Wealth Management. ‘I was more surprised by the strength of equity markets in 2017,’ he said.
Barber said Epoch was ‘bullishly positioned’ for equity market growth in 2017, but the growth exceeded expectations. ‘We didn’t forecast 30%-plus total return moves in Asia ex Japan in 2017 in local currency terms, nor US markets up 21% and Japan up 19%,’ he said.
The persistence in US dollar weakness from October to December 2017 also surprised Barber, as he did not think this was justified by economic fundamentals. ‘We expected strength to come back through and that informs our currency positioning today, which is unhedged in US equities and some global bonds,’ he said.
He pointed out today’s equity markets do not look cheap in historical terms. He added: ‘There’s more Trump protectionist rhetoric, while the macro backdrop of central banks, especially in the US, is changing direction.’
Consequently, Epoch is moving from overweight to neutral equities. ‘But we’re not overly bearish on shares,’ said Barber, ‘as we’re bearish on pretty much everything else as well.’
But the wealth manager is overweight alternatives, and long-short equity funds in particular. These include Odey Absolute Return, Old Mutual Global Equity Absolute Return, Janus Henderson UK Absolute Return and Schroder QEP Global Absolute.
Barber said: ‘We’re into these as, if we’re right and equity markets are fully valued, then fundamentals will play a bigger part in future returns. So good companies that grow earnings will be boosted but others won’t be, whereas previously everything did well.’
In this environment, long-short equity managers can capture more of the relative outperformance of one company versus another, according to Barber. ‘We think alpha will be a bigger component in future returns than previously, which informs our overweight to long-short equity,’ he said.
This tilt towards alpha generation also means Epoch is making less use of passive funds. ‘The highest allocation was 15% to 20%, in 2014. It’s now just between 1% and 2%, which is our lowest ever allocation to passives,’ Barber said.
But he added he does not see passive versus active as binary. ‘There are strategies in between the extremes,’ he said, highlighting the ‘keenly priced’ Schroder QEP Global Core fund. ‘This has tight regional and sectoral constraints, but tries to secure some outperformance through a quant overlay and a final human qualitative assessment.’