As the world emerges from the most profound and far-reaching financial crisis since the Great Depression, Murray Asset Management’s chief investment officer Simon Lloyd is cautiously optimistic.
He is not only positive about the equity markets over the longer term, but also hopes the Edinburgh-based boutique will be well positioned for growth, particularly with the onset of the retail distribution review (RDR) in January 2013.
The firm was formerly the investment management and financial planning division of law firm Murray Beith Murray, but was spun out and made independent in March 2008. It was a decision that was driven in part by changes to regulation and capital adequacy, together with the motivation to boost growth in the business as a standalone.
‘Partly it was regulatory driven. It also came at a time that we wanted to separate the business to generate growth, although that has been quite hard under the circumstances,’ Lloyd says. ‘The idea was to loosen ties between the two firms to allow Murray Asset Management to stand on its own and see clients on its own and build its own profile.’
He adds that the team has sought to ensure that through the transition, service for existing clients has been seamless.
Although Lloyd concedes the timing could have been better, the move has helped to attract new business from other professional introducers. And with £275 million under management, the team is now looking ahead to the next stage of growth.
‘For us, it is as if we were coming in as a complete unknown. We are well known in the industry and among our peers, but among advisers and professionals we are not particularly well known,’ Lloyd says.
‘Really, the thrust of what we are doing is raising awareness, initially among professionals through invites to seminars and one or two strategic adverts to raise name awareness of our company.’
Lloyd hopes growth will be driven primarily through professional referrals, referrals from existing clients and hopefully being able to retain the ‘independent’ label post-RDR as a result of offering financial planning alongside investment management.
‘We are aiming for the independent moniker. We are a bit more open about saying we do planning and are interested that others are moving in our direction, rather than the other way around and going the pure discretionary fund management route. It works really well,’ he says.
Lloyd’s optimism extends to the equity market, where he believes a long-term trend of declining valuations is set to reverse. Likewise, he says the end of a 30-year bull run in global bonds could be in sight.
‘We have had a period of a secular trend of declining valuations in equities. There have been cyclical bull runs within that trend, but the secular long-run trend is 12 years of declining markets and valuations. In terms of the long term we are getting more excited about the prospects, because as things are getting cheaper and cheaper you are looking hopefully at an extended period of rising equity valuations,’ he adds.
While he says dividend growth, particularly in comparison with bond yields, could help to drive this long-term trend, he is prepared for shocks along the way.
‘Is the market going to push on rapidly next week? I don’t think so, but it could be higher by the summer,’ he notes, adding that Europe appears to be losing its ability to shock markets.
‘We have had a diet of very bad news in Europe, but it has to get materially worse to scare the market more than it has been scared already.’
He notes that in Europe the potential fallout of a break-up of the single currency may well have been lessened by the long-term refinancing operations (LTROs). Highlighting a view put forward by professor James Clunie of Scottish Widows Investment Partnership, he says the LTRO has inadvertently allowed banks to match their assets and liabilities in problem peripheral countries, which means that if they do end up leaving the euro, banks with matched assets and liabilities will be able to ring fence their regional operations, potentially reducing systemic risk.
‘Perhaps what professor Clunie is saying, is “has the LTRO made the likelihood of a country or countries coming out of the eurozone more likely?” I think it has,’ Lloyd says.
Nonetheless, he expects eurozone leaders will maintain the political will to keep the monetary union together and expects that further LTROs with longer-term repayment periods could come into play as a part of this.
‘Our big concern – more than Europe – is the oil price. It could be a big spanner in the works,’ Lloyd continues, arguing that a spike could serve to derail a fragile global recovery.
Yet conversely, he finds the prospect of the US achieving energy independence through shale gas development over the next few years an exciting one. ‘If they achieve energy independence we may have a massive resurgence in the US economy. The process we are going through is one of the West becoming more competitive on a global basis. It is quite painful, but the result is we do have a renaissance in manufacturing.’
This optimism feeds through into asset allocation, with Lloyd and the team recently adding to their US equity allocation, having reduced exposure to Japan.
Within the overseas equity exposure in a typical medium risk private client portfolio, the team is overweight Asia and emerging markets usually accessing overseas markets through funds. In the UK market, dependent on client preference, the team has tended to invest in direct equities, with a particular bias towards FTSE 350 stocks. A medium risk client will have around 48% in UK equities.
‘We endeavour to be long-term investors. Our ideal is to own a stock from when it is small and hold it right the way through and take profits where we can. We tend to have pretty low turnover for portfolios,’ he explains.
By contrast, the team believes Taylor Wimpey, Balfour Beatty, and BT are looking attractively priced at current levels. Domestically focused banks, on the other hand, represent a more challenging call.
‘We acknowledge we should be looking at banks and have been talking about where things are going with them, but what strikes me is we are still completely under the influence of opinion on Europe. You are not getting an investment in a bank’s future, just a warrant on what is going to happen in Europe and we are not ready to take that risk yet,’ he says.
Stock selection has helped to increase performance in the first quarter, Lloyd says, adding that the team expects two thirds of clients to outperform, or perform in line with Apcims’ benchmarks.
The team is allocating around 10% of a medium risk portfolio towards bonds, with a bias towards strategic bond funds, short-dated corporate bond funds, and a low exposure to gilts, where Lloyd does not see much value.
Portfolios also have exposure to absolute return, infrastructure and thematic funds, alongside gold – where the investment manager anticipates that gold equities could have potential to surprise on the upside as a higher price feeds through to companies.
Where available, Lloyd says, the team buys institutional units and as a result of being incorporated from a law firm has always had a tradition of being fee-based. Likewise, all of the team are RDR-qualified and the business is ready for the oncoming regulation.
‘RDR is not a concern for us. Something which has surprised us has been how reluctant big fund houses have been to let us into institutional units,’ Lloyd says.
He adds that picking up investment business from advisers looking to outsource represents another area the team is currently looking at, particularly as the RDR creates these opportunities.