Schroders multi-manager head Marcus Brookes (pictured) is close to his highest ever cash weighting in the £1.3 billion Multi-Manager Diversity fund, warning the bull market could end ‘when people aren’t expecting it’.
Speaking to Wealth Manager before concerns about the US economy sparked a sharp downturn in markets this week, Brookes said Diversity currently has a cash weighting of around 30.6%, up from 25.5% at the end of last year.
While Citywire A-rated Brookes has concerns that the bull market could end when people least expect, he stressed: ‘I am not saying this is the end of the bull market.
‘If I get caught underperforming in a market that looks expensive, I will feel I have let my investors down,’ he added.
Around 8% of that cash weighting is in dollars, as the team expects the currency to benefit from the US Federal Reserve’s tapering of asset purchases.
‘One of the problems investors now have is that data is supportive of a risk-on environment. It’s supportive for high yield, emerging market currency and debt, but at the moment those assets are not going to perform well,’ Brookes said.
‘We are looking at the world in a different way to normal. We think the dollar may well strengthen as less QE is expected. The day the US raises interest rates has been brought forward because of good economic data.’
The Cazenove multi-manager team, which also includes Robin McDonald and Joe Le Jehan, runs a combined £2.5 billion in assets. Over the 12 months to the end of November, all but one of the funds in their seven-strong range were top quartile.
To the end of last year, the Diversity fund was top quartile over three years and second quartile over one, with a return of 10.8% compared with 8.8% for the IMA Mixed Investment 20-60% sector.
Cazenove’s strong presence in the multi-manager space is likely to have proved a key attraction for acquirer Schroders.
Brookes sees potential in the funds but said he wants them to grow ‘manageably.’ ‘It would be nice to think we are doing a job to get up to £10 billion but it took Jupiter 16 years,’ he pointed out.
Getting into Japan and Europe early and largely avoiding emerging markets helped to drive performance
Brookes’ only regret last year was that the team ‘should have had more of the stuff they owned and been more invested than we were’.
Another reason for the build-up of cash is because he has ‘taken the tops off’ some of the calls that have done well for him. He has now started trimming the biggest holding in Diversity, which is GLG Japan Core Alpha, managed by Citywire + rated Stephen Harker.
The holding, which was a 4.9% position at the end of December, rose by 55% in the past year, but Brookes does not think the investment case is still as strong.
‘As good as we think Steve is, and as good as we think the story is, I don’t think it’s as good a story as before,’ Brookes said.
‘We are trying to buy assets as they are declining. You want your maximum to be somewhere near the bottom.’
As Brookes views fixed income as expensive, he has been adding to equities, particularly in Europe. The Diversity fund has a 27% allocation to equities.
‘Equities have done really well, but there are pockets of value in Europe and Japan. We may be interpreted as cautious on equities but that is not really the case. We are not investing in a super-safe space.’
The multi-manager range invests in Cazenove European Income, Invesco Perpetual European Growth and Artemis European Growth, as Brookes explains these managers ‘share our view that the European recovery is going to come quicker than expected’.
Elsewhere, he is also taking ‘baby steps’ towards commodity stocks, after a rocky period in 2013 due to a slowdown in demand from China.
The team holds the BlackRock Gold & General fund, which fell by almost half last year. However, Brookes bought the fund near the bottom of that trajectory.
The manager has built up a 1.3% position in the fund, which although small, is described as a ‘statement of intent’.
‘We do not think the gold industry will go bust. We think the gold price will be stable and may even improve,’ he said.
The multi-manager range has also taken a position in JP Morgan Natural Resources, run by Neil Gregson, as the managers anticipate a pick-up in infrastructure spending in the US as its fiscal situation continues to improve.