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Performance review: Close Bros swaps bonds for equities

Performance review: Close Bros swaps bonds for equities

Close Brothers Asset Management’s (CBAM) Nancy Curtin (pictured) says the use of equities as a bond proxy is the only way to meet clients’ income requirements.

Curtin, chief investment officer at CBAM, said the firm has adapted to the new world order, in which companies are paying out increasing dividends and central governments are stifling bond yields with monetary easing.

This has prompted her team to re-examine their private client medium risk portfolios, in some cases reversing the 60-70% allocation to bonds to the same in equities.

‘We are running a broad mix of portfolios, some with a growth mandate and some with an income mandate,’ she said. ‘Before this policy change I would have solved growth with equity and income with bonds, and now we are using equities for both.

Curtin stressed, however, that a client’s individual appetite to risk is always taken into consideration.

‘For many of our clients, who might have had 60% bonds and 40% equity 10 years ago and who need income, we tell them we can’t pay out that income from government bonds and it comes at a time when companies are paying more in dividends,’ she said.

Curtin added the overweight to equities could increase further if earnings come through in the summer, following a disappointing first quarter.

The volatility caused by this, alongside problems caused by poor weather in the US and weak data out of China. heralded a ‘healthy and much needed correction’, she said.

‘We have had such a funny year. In January and February, things that performed well last year continued to perform well. In March and April, the market hit a wall and there was a massive rotation into both utility and energy companies, which tend to have a good dividend yield and be quite defensive,’ she said.

Markets fully priced

Then in May, sectors favoured by CBAM, such as healthcare and technology, went up ‘across the board’. In Curtin’s view, markets are now ‘fully priced but not excessively expensive,’ after getting ahead of themselves last year.

This suits the firm, which uses a value-driven strategy in its portfolio construction.

‘The market has run up and we believe in value in the long term. If we can buy something on sale that is nothing to do with the case for the stock, we will. Then we use our research to confirm a stock has characteristics – like it is defensive and has a progressive dividend policy,’ Curtin said.

Performance-wise, the CIO’s priority is to achieve good risk-adjusted returns, rather than shooting the lights out.

‘Do not come to Close if you want to be top dog – but we probably won’t be bottom quartile either. We would like to steer our way over the second quartile and if we can do that with lower risk, than that’s even better.’

Over the 12 months to the end of May, the Balanced fund – reflective of a typical medium risk private client portfolio – has returned 6%, compared to 4.6% by the respective IMA sector.

Over the past three years, the same strategy is up 24% versus 20.3% by the IMA sector.

Looking ahead, Curtin thinks the headwinds that circled in the first quarter will diminish, provided companies can back up analysts’ estimates. ‘In the second quarter we have had a pick-up in the US – Yellen is dovish and does not want to raise rate – and Japan has eased the consumption tax,’ she said.

‘We got what we wanted and now we need to see earnings growth come through. We are in this short-term market where we need to see that earnings growth reflect these policies.’

Earnings growth optimism

Curtin is quietly optimistic this will take place. ‘Politicians are going for growth, markets are going higher and my sense is that we will then pause and see earnings growth come through,’ she said.

Curtin became CIO at CBAM in 2010 after occupying the same role at Fortune, a Close Brothers subsidiary. She also heads the bespoke investment management team.

Buy

Healthcare: ‘We like healthcare stocks as they have good dividend yields and solid balance sheets.’

Hold

Consumer defensives: ‘We will always have a position in Nestlé and Unilever but they do not represent excellent value.’

Sell

Facebook: ‘We do not like highly priced equities like Facebook, where we have a lot priced in and if they disappoint that is a long way down in the elevator.’

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Nancy Curtin
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