Peter Lowman, Investment Quorum’s chief investment officer, is maintaining his exposure to the US, but warns earnings growth will have to come through if the market is to continue its rally. In the firm’s IQ Balanced Solution portfolio, he has a 14% allocation to the region but is unlikely to add to this.
‘2014 is a bit of a conundrum,’ he said. ‘We might see the US markets continuing to rise but softer-looking corporate earnings could be the call for the rest of the year.
‘We have to be careful that the US has not run ahead of itself. We are at a crossroads where we just have to wait and see how the first quarter pans out.’
While Lowman believes the US should do ‘OK’ in 2014, he says the 25% to 30% returns seen in 2013 will not be repeated.
Despite branding Europe a ‘total mess’, he maintains a positive outlook on it, with a 9% allocation.
‘Given that Europe is at an early stage of its economic recovery, and is probably 18 to 24 months behind the economies of the US and UK, it seems logical that further investment opportunities will present themselves,’ he said. ‘Numerous European markets have already delivered excellent returns last year, but further investment returns are most likely over the coming years.’
Over the last six months, Lowman has doubled his allocation to Japan to 6%. While a ‘tricky period’, including the consumption tax rate rise in April could ‘take a little of the shine off the market’, he said: ‘The upper and lower house are backing Abenomics, so if we get over that hurdle, there will probably be more juice in the market.’
But he recommends selling A-rated Neil Woodford‘s Invesco Perpetual High Income fund, in light of the manager’s pending departure. ‘It may be time to exit this fund in favour of other funds within the UK equity income sector, given that there are a number of very well managed funds to choose from,’ he said.
In fixed income, Lowman has moved from neutral to negative, shaving seven percentage points off his exposure, taking it down to 18%. He anticipates the 10-year Treasury yield will move above 3% this year.
‘If it moves back to 3.5% or even 4%, that will be quite attractive. Looking at UK yields, we’re going to start seeing better yields on gilts. If the FTSE hits 7,000 people might start thinking about taking some profits and taking advantage of gilts yielding 3.5%.’
Ultimately, this could serve as a protection against a potential market shake out, he said.
Over 12 months the portfolio has returned 15.64%, outperforming its IMA Mixed Investment 40% - 85% shares benchmark, which rose 13.77% over the same period. Over three years, the model is up 18.98%, against the benchmark’s 17.68% rise.
Over the last year, performance was largely driven by the portfolio’s exposure to US and Japan. ‘The developed market performances over the year were brilliant. It was very much helped by all the central banks fronted by the US, which were all very accommodative with policy.’
His high yield exposure also boosted returns.
On a forward view, he said a potential US pull-back could be advantageous as a ‘healthy correction’ could translate into an opportunity to buy back into the market.
In the second half of 2014 he expects to find value in the developing world, which he describes as ‘the interesting one’. While Lowman acknowledges they could have ‘another leg down’, he believes a lot of the concerns about growth levels and the impact of tapering are already priced in.
Despite an apparent split between Asia, ‘which didn’t do that badly’, and Latin America, which he says had an ‘awful’ year in light of commodity prices, he said positive news more broadly could come from the Brics’ structural reform programmes. ‘They have come back a long way and we could well add to our Latin America exposure past 2015.’
‘In order to grab further economic recovery opportunities in Europe, it could form part of a wider European asset allocation and act as a diversifier’
Hold: Lindsell Train UK Equity
‘Nick Train’s strategy is to invest into good quality businesses, giving the fund an opportunity to flourish over time’
‘With Neil Woodford’s departure has come some uncertainty, so it may be time to exit this fund in favour of others in the sector’