Brown Shipley CIO Peter Botham is moving out of the US to capture a European recovery and counter muted returns in 2014.
‘I think you’ll struggle to make more than 10% total return this year,’ Botham said. ‘Last year’s equity run was all about buying for the good news of this year. By and large, it is already priced in.’
This, he said, is in stark contrast with 2013 when returns beat expectations of between 10% and 12% for the year with the FTSE fair value at 6,500.
Botham (pictured) has been struggling to find much value in the US. Believing the recovery has already played out has led him to take profits and trim his exposure.
‘You could argue it was possibly wrong that we took money out of the US because the markets kept going, but that 3% to 4% went into Europe during the course of the year on the back of anticipated growth and recovery,’ he said.
During the year, he also took money out of emerging markets, reducing his exposure to 3%. Some of this money was added to his position in Japan in the first quarter of 2013. ‘I am still on the bullish side on Japan, but my 5% allocation doesn’t reflect that entirely,’ he said, adding the country was still a ‘gamble’ despite the recent Abenomics-backed momentum. He anticipates Japan will deliver ‘above average returns’.
In fixed income, Botham has turned bullish on global and high yield bonds with a 10% weighting, two-thirds of which are in high yield and emerging markets. He recently bought into the Schroder ISF Global High Yield fund.
Part of his emerging market equity exposure was transferred to EM debt. ‘After the mid-year big sell-off, we thought there was some good value once again. Yields got to 6%, or 8% so we put some money back into that.’ He holds the Legg Mason Western Asset Emerging Markets Bond and the Payden Emerging Markets Bond funds, which he uses for ‘riskier parts’ of the market. The portfolio has a 4% allocation to corporate bonds.
‘I’ve been more bullish this year, especially on commercial, industrial and office buildings. The London thing is already starting to ripple out to the rest of the country.’
Over 12 months, the group’s Balanced portfolio, which has a 61% allocation to equities, has returned 10.15%. It outperformed the ARC Balanced Asset PCI benchmark (40-60% in equity), which rose 8.8% over the same period, but underperformed the ARC Steady Growth PCI (60-80% in equity), up 12.5%.
Botham’s early call into UK small and mid caps helped drive performance, boosted by a 44.25% return from the Chelverton UK Equity Income fund run by AAA-rated duo David Taylor and David Horner. He also points to the Franklin UK Mid Cap fund, managed by AA-rated Paul Spencer and A-rated Mark Hall, as a top performer, followed by the sterling hedged JPM Japan fund.
Botham acknowledges holding direct equity in certain stocks with heavy emerging market exposure, such as Unilever and Diageo, hampered performance. ‘They are loved by private clients for the income but fell out of favour last year and lagged the market by a mile.’
In 2014, he expects returns of 7-8% in the US, mid-teens for Japan and a targeted 10% for the UK and Europe. ‘In Japan, growth will almost entirely be capital because there is not that much income but it is better than it was; and recovery is still to come through in Europe.’
He believes it is too late to sell out of emerging markets but adds they could turn around because a lot of the risk, such as the impact of QE tapering, is already priced in.
Buy: Growth large cap equities
‘Very few bargains but relative valuations now favour large cap stocks that can show strong earnings growth to justify the rerating that has occurred across equity markets in the past year’
Hold: Emerging markets
‘If investors want to get exposure to emerging markets then buying fixed income for the high yield probably has more attractions than equities in the first half of this year’
Sell: Commodities, including gold
‘Base commodities will benefit from a gradual recovery, but this is unlikely to offset the effects of current stockpiles and an increase in supply’