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Five wealth managers' key third quarter calls

With the third quarter behind us, we ask a handful of wealth managers what their most important calls were.

Lorne Baring

Managing director, B Capital, London

‘Being overweight in emerging market and European equities made the best contributions to our portfolio performance this quarter. Aggregate forward earnings estimates for the next 12 months of 12.04x and 12.58x respectively indicate significant further price appreciation is possible. On a forward looking basis (as opposed to trailing P/E analysis which is by definition backward looking) these markets are inexpensive still.

‘It’s important to remember the effect of dividends year-on-year as well, which further strengthens the case for continuing to hold equities. Manufacturing PMI data in Europe is at a 77-month high, according to Markit Economics, so we look for export-focused mid-level corporates for value and have a preference for German smaller capitalised companies to complement a “European catch-up” macro theme.’

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Lorne Baring

Managing director, B Capital, London

‘Being overweight in emerging market and European equities made the best contributions to our portfolio performance this quarter. Aggregate forward earnings estimates for the next 12 months of 12.04x and 12.58x respectively indicate significant further price appreciation is possible. On a forward looking basis (as opposed to trailing P/E analysis which is by definition backward looking) these markets are inexpensive still.

‘It’s important to remember the effect of dividends year-on-year as well, which further strengthens the case for continuing to hold equities. Manufacturing PMI data in Europe is at a 77-month high, according to Markit Economics, so we look for export-focused mid-level corporates for value and have a preference for German smaller capitalised companies to complement a “European catch-up” macro theme.’

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Matthew Stanesby

Investment director, Close Brothers Asset Management, London

‘One thing that has kept us ahead of the curve in Q3 has been our slightly overweight position in risk assets, and within that our emerging markets and Asia holdings have been performing strongly. This has been buoyed by valuations that are comfortably discounted against developed markets. The macroeconomic backdrop is also supportive, with expected GDP growth more than double that of developed markets in 2017.

‘It’s been a topsy-turvy ride for gilts over the last few months, with strong performance off the back of Brexit concerns and the threat from North Korea. More recently, they have sold off, with the talk of the US reducing its balance sheet and comments from the Bank of England implying rate rises will come sooner than expected. In this environment it’s pleasing to see that our preference for flexible bond funds is paying dividends as they have produced positive returns while both gilts and investment grade credit have produced negative returns.’

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Tom Beckett

Chief investment officer, Psigma Investment Management, London

‘The best relative call we have made in Q3 2017 has been to persist with our underweight US dollar position, which was positioned last autumn following the heavy falls in the pound after the UK’s decision to leave the European Union.

‘US dollar assets have been hit by the 10% depreciation in the dollar against the pound, for UK investors, while assets positively linked to a weak dollar, most notably emerging market debt, have performed well.

‘Currency decisions have assumed a far greater importance within portfolios over the last 18 months, with further evidence to be seen in recent outperformance of Japanese equities; another favoured Psigma position. The weakness in the yen versus the dollar in recent weeks has led to strong performance from Japanese equities and we have benefited fully from the gains as we hedged the yen back to sterling, meaning the pound’s recent resurgence has not crimped our gains.’

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Robin Kyle

Investment manager, Tcam, Edinburgh

‘Our most important call in the third quarter was the decision in mid-August to hedge the last of our low duration fixed income exposure back to sterling. In the short-term, the switch locked in some of the gains from 2016/17, with the pound subsequently rallying against both dollar and euro on Mark Carney’s suggestion that interest rate hikes may be imminent.

‘However, while the performance tailwind has been welcome, the decision to hedge was part of a wider asset allocation call to reduce currency risk from our lower volatility assets. With markets at inflated levels and exogenous risks – both political and economic – increasing, there is potential for increasingly severe short-term movements in currency pairs, particularly with sterling.

‘Removing this risk from lower volatility holdings aligns with our strategy of both protecting and growing our clients’ wealth.’

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James Horniman

Portfolio manager, James Hambro & Partners, London

‘Our most important call was having the conviction to stick with the equities we favour and do the work to dodge the bullets. We made a small reduction in equity positions at the beginning of July but that only leaves us marginally underweight equities. With most areas generating positive returns over the quarter we are happy with that decision.

‘The market is now definitely climbing the wall of worry. Though valuations are not yet a danger sign, current levels do suggest that future equity market returns require positive earnings growth for justification. We remain cautiously optimistic but we see plenty of evidence to justify remaining invested. Earning revisions remain in an uptrend in all major regions. Recessions and declining equity markets have historically been caused by aggressive monetary policy tightening, financial crisis or significant over exuberance. If the pattern is the same in this cycle, we may still be some way from a “classic” recession trigger. In addition, yield curves usually invert ahead of recession and leading economic indicators start to decline; neither is happening today.

‘As for bullets, there have been a few of those flying around lately. The core element of our equity portfolios are held in direct equity positions that we choose ourselves. The key here is to make sure we are comfortable with visibility. That means our exposure to some big under-performers, has been minimal to zero.’

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