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Performance review: UBS Wealth duo bet on a weaker euro

Performance review: UBS Wealth duo bet on a weaker euro

UBS Wealth Management’s UK chief investment officer Bill O’Neill and portfolio manager James Mulford are backing European equities as a key beneficiary of a weaker euro.

The two had taken profits in Japan within the UBS Global Balanced fund at the end of last year, recycling cash into eurozone equities.

‘That worked well for us, Japanese equities were up 47% last year in yen terms,’ said O’Neill. ‘But eurozone equities will play catch up in terms of profit margins and earnings growth.’

A 9.2% allocation to Europe is run via the BlackRock European Dynamic, managed by Citywire AA-rated Alister Hibbert, and JO Hambro Continental European funds, which beat the MSCI Europe ex-UK index by 4.8% and 5.5% respectively over one year. The latter is run by A-rated Paul Wild.

‘A weakening euro is a key theme in the portfolio. As many of the earnings are generated overseas, you get a tailwind with a weak euro as you repatriate those earnings,’ Mulford said.

Within that allocation he is playing a recovery in financials, particularly banks, where he expects earnings to continue to strengthen.

The duo say prices in Europe still look historically cheap to fair value. While performance was driven by a price-to-earnings rerating in 2013, this year’s market has to be driven by earnings growth.

They point to forecasts of 9% earnings growth in the US versus 14% in Europe. ‘There is a lot baked into the cake and if it doesn’t come through it could be difficult for markets to go higher.’

O’Neill highlights UBS’s forecasts of 7-9% total returns in developed markets. On a six-month view, they expect the S&P 500 will stand at 1,950, while the FTSE could hit 6,725.


Over the last 12 months, the UBS Global Balanced model is up 3.6%, compared to its composite benchmark, which rose 2.7%. Over three years the portfolio delivered 5.3% against 6.3% by the composite index. The underperformance is attributed to 2011 when the duo was short duration and underweight gilts, Mulford said.

In the US, which is still favoured, Mulford backs active funds for mid and small-cap exposure, including Findlay Park American and Wells Fargo US All Cap Growth funds.

‘That worked well last year because the mid caps massively outperformed, but it has not worked so well this year because there has been a bit of a sell-off in small and mid caps relative to the S&P 500.’

Exposure to large caps is through an iShares tracker, with plans to roll out an in-house UBS US Equity Tracker fund.

Closer to home, Mulford favours mid-caps as a domestic recovery play. The team’s stock selection includes financial and industrial names IG Group, Beazley and DS Smith.

US high yield and investment grade corporate bonds have also been a ‘big positive’ over 12 months, with Mulford citing the M&G Corporate Bond fund as a performer. The fund is managed by A-rated Richard Woolnough.

The team is neutral duration, which drove performance. ‘The long end has performed well; the short end has already taken the brunt of anticipated rate rises.’

BUY: Eurozone equities

'Supported by loose monetary policy, improving GDP growth and a recovery in profit margins – all of which should translate into higher eurozone corporate earnings in 2014'

HOLD: Emerging market equities

‘Consensus expectation is for emerging market earnings to grow by 10.6% over the next 12 months. We are more cautious, however, and expect around 9%’

SELL: Gold

‘US monetary policy normalisation, a favourable growth-inflation mix in the developed world and fewer tail risks reduces investors’ need for insurance assets, such as gold. We expect the price of gold to drop to $1,250/oz in six months’ time’

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Richard Woolnough
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38/70 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 11.14%
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