OakTree Wealth Management founder Ian Brady traded emerging market exposure ahead of this summer slide for European and US equities, but is wary about the current run in risk assets.
In the firm’s Income and Growth model portfolio, Brady (pictured) shaved 9% off Asia and emerging markets ahead of May on his concerns about risk-taking in credit and property.
‘Because a lot of consumption was credit-based, we moved our allocation into continental Europe and the US to 7% and 7.5% respectively,’ he said. He holds a 3% allocation to Invesco Perpetual European Equity Income fund, run by Citywire AA-rated Stephanie Butcher, and a 12% exposure to Newton Higher Income fund.
Brady, who is also the company’s chief investment officer, is playing Japanese equities momentum, adding 15% in late 2012, before taking some profits over the summer.
More recently Brady has upped his allocation to 7% via AA-rated Chris Taylor’s Neptune Japan Opportunities fund, Paul Chesson and Tony Robert’s Invesco Perpetual Japan, And Citywire AA-rated Scott McGlashan and Ruth Nash’s JO Hambro Japan fund.
‘We were very positive on Japan but didn’t expect an 80% rally six months ago.’
Former cover star Brady currently holds 40% of the portfolio in sterling-based assets but is wary of high yielding companies which he says don’t necessarily offer further growth. He adds that at current valuations UK equity remains vulnerable to ‘earnings disappointments’.
However, Brady favours tobacco stocks, selected pharmaceuticals that can grow margins and selected capital goods companies, which can benefit from growing business expenditure. ‘Those only should do well’.
In fixed income, Brady has not held gilts for the best part of last year, instead moving his exposure to short duration credit-sensitive bonds through the Cazenove Strategic Bond fund and the TwentyFour Monument Bond fund.
Over the last year the portfolio has returned 20.87%, outperforming its IMA 40%-85% Equity and APCIMS Balanced composite benchmark, which rose 16.97% over the same period.
Over three years the model is up 26.22% against its benchmark’s 22.41% rise.
Alongside his play on the Japanese rally, Brady said his early exit from Asia helped performance. He cites Neptune Japan Opportunities, JO Hambro UK Equity Income and Invesco Perpetual European Equity Income funds as key drivers of profit.
‘The latter really embraced a turnaround in peripheral Europe, where the team bought good companies in bad markets,’ he added.
Conversely, Capital International Emerging Markets and + rated Richard Sennitt and Thomas See’s Schroder Asian Income Maximiser funds haven’t displayed the relative defensiveness they have in the past.
‘They underperformed because a lot of their defensives have become expensive, and they have moved a bit more cyclical to get more value on the portfolio.’
Brady is more bearish about the next 12 months, describing 2014 as the ‘end of the party’, and believes performance will be harder to come by this year.
‘Any rise in 2014 will not be as high as the past two years,’ he warned. ‘Valuations are no longer there but momentum has improved– and anything could happen.’
Performance will remain sluggish until Europe shows a move towards a firmer banking structure, Brady said, as well as profit growth coming through.
Likewise, he points to an end of the easy gains in Japan, a ‘lack of confidence’ in Bank of England governor Carney and weak currency and inflation issues in emerging markets as further hindrances to performance.
More positively, he believes that Japan’s ‘deferred’ reforms could push markets to new highs if they are finally delivered. ‘It could go through 18,000 if economic reforms go through in 2014.’