James Calder, head of research at City Asset Management, has sold his broad global equity and US exposure to buy small caps in Europe.
In the firm’s Balanced Discretionary portfolio, Calder (pictured) has reduced his US exposure to 11% below the benchmark, but has introduced an 8% overweight in Europe, where he bought Citywire AA-rated Ian Ormiston’s Ignis European Smaller Companies fund.
‘This part of the market has been overlooked for a number of years. Companies that have survived are in very good shape and are ready to take on new businesses. That screams potential for good growth,’ he said.
In the US, he still holds the Findlay Park American and CF Miton US Opportunities funds. Closer to home, he has increased UK exposure by 5% to 20% of assets this year, in light of improving economic data.
‘It’s not just the case of increasing the weighting to the UK equity space, but we are actually buying small cap managers there too,’ he said, pointing to the CF Miton UK Smaller Companies and the Old Mutual UK Dynamic Equity fund as key investments.
The latter has the advantage of being able to hold short positions in a FTSE 250-biased portfolio, he added. ‘In this environment, the manager is more often than not 100% net long, but at certain points in the cycle when the outlook is negative he can take risk off the table,’ he said. ‘We like managers that have that kind of ability.’
Calder finds diversification through specialist vehicles such as the Tritax Big Box Reit, the first UK listed ‘big box’ real estate investment trust, which invests in distribution centres such as Amazon.
He also recently bought Better Capital trust, which plays the restructuring story of businesses in financial distress.
In fixed income, where he has reduced his weightings by 6% to 16% of assets, Calder is looking for managers with a ‘high degree of flexibility’ to go short or invest in different areas of the bond market. He has added strategic bond fund managers alongside the Absolute Insight Credit fund.
‘It will be more and more difficult for traditional managers to hit our CPI +4% target over the short to medium term,’ he explained.
Calder remains wary of interest rate rises and is finding value in floating-rate notes, backing investment trusts Neuberger Berman Floating Rate fund and JP Morgan Senior Secured Loans fund.
Conversely, he has completely pulled out of index-linkers and sold his direct gold exposure. ‘Inflation will come back into the system at some point, but we don’t think it will be in the short term.’
Over the past year, the portfolio has returned 10.54%, outperforming its UK CPI +4% benchmark, which rose 5.74% over the same period. Over two years, the model is up 18.32%, against the benchmark’s 12.87% rise.
Performance was driven by the portfolio’s exposure to the UK recovery through the Ardevora UK Equity fund, run by AA-rated Jeremy Lang and William Pattisson, and recent addition Saracen Global Income and Growth fund. Calder says his allocation to CF Miton’s US Opportunities fund also boosted performance.
Despite a ‘mixed’ year for alternatives, he cites the Morgan Stanley Diversified Alpha Plus fund as a key driver of profit.
Calder’s 7% South Asian equity position has hampered performance. That said, he will retain his allocation. ‘We are bullish on those regions due to the fact that the demographics are positive. These have been hit quite hard during quantitative easing tapering talks, but we’re comfortable holding our weights at present.’
More positively, he expects to shift more of the portfolio out of the US into Europe, where he forecasts things will continue to improve.