Surprised by strength of rally
While Cole said the £290 million fund had ‘fully participated’ in the liquidity–driven rally of February and March of this year, he had sold down his equities exposure in April expecting a sustained market pull-back.
He told investors: ‘We have been surprised by the strength of equity markets with central banks much more radical in their approach to fiscal policy than we expected. This is why we have underperformed recently.’
Going forward Cole believes the major concern for 2013 will be uncertainty around the US as it looks to address its fiscal cliff, although he believes its predicament will be resolved far earlier than that of the indebted eurozone.
‘[Federal reserve chairman] Bernanke has made it his goal to reduce unemployment and all the indications are that he will continue to keep monetary policy very loose, both in terms of very low interest rates and continued quantitative easing programmes until that objective is achieved.’
‘Even then he has suggested that he may need to over-egg it and we wouldn’t want to be fighting the Fed so this has made us more positive about the US generally.’
European unrest as austerity bites
‘The European Central Bank will do whatever it takes to make sure the euro does not come to an end but it does not make the eurozone any safer as governments are increasingly being threatened by their electorates because the guarantee of sovereign bond support comes [at the price of] further austerity measures.’
Cole also remains sceptical on Chinese growth saying the country’s landing has been harder than expected while policy relaxation has been slower than anticipated. If the incoming government speeds up the process he will consider adding to his exposure to the region.
At the end of August, the fund had 17% in UK equities, 11.4% in global equities and a further 7% in specialist equities but Cole said that in the past few weeks the UK portion had ‘crept up’ and he said he would increase this weighting if there was further market weakness.
‘We remain cautiously positioned although we have increased equity exposure in the US and UK. [But] after the good run through the summer it is hard to see further good news by year end, especially with the fiscal cliff.’
Elsewhere in the fund, some 32% is in global bonds with Cole declaring many are still offering reasonable value while also looking less volatile than equities.
High cah levels and gold exposure reflects cautious stance
‘The corporate sector is still sitting on a lot of cash so credit looks reasonably attractive but we have recently reduced our exposure to US government bonds.’
Cash levels remain high at almost 17%, reflecting Cole’s cautious stance with the biggest positions remaining a 7.6% stake in 2022-dated Australian government bonds despite them trading weaker in recent weeks, and a further 6.3% of the fund is held in a gold ETC.
Since launch at the end of March 2009 to the end of September 2012, the fund has returned 38.3% compared to the Citywire Sector mixed asset absolute return - average manager return of 32.9%.
Citywire Watch list verdict: An overly defensive stance through last summer as equity markets rallied has caused short term underperformance, but Andrew Cole is a level headed investor who is wary of macro risks and has managed to steadily outperform his benchmark since the fund’s March 2009 launch. Cole is bearish on China and Europe, and remains concerned over the US’s ability to sustain growth as it faces up to its fiscal cliff next year.