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Why this wealth manager is sticking with emerging markets

Why this wealth manager is sticking with emerging markets

Kevin Gillibrand (pictured), director and co-founder of Fraser Wealth Management, is keeping faith in emerging markets in spite of recent underperformance.

A typical medium risk model at the Liverpool-based firm has around 5% in emerging markets through the Invesco Perpetual Emerging Countries fund, and a further 5% in Asia ex Japan. In spite of recent underperformance, he contends ‘better times are ahead’ and is keen to highlight the underlying growth that countries such as China are still experiencing.

In Asia Pacific, where the team backs Newton Asian Income, the director plans to add a further 5%.

Gillibrand remains bullish on equities on the back of good economic data.

‘The data appears to show we have averted catastrophe, leading to a rally in the markets before year-end. While the world turns to another cycle, equities will be the best performing asset,’ he explained.

In a typical medium risk portfolio Gillibrand is bullish on growth assets and highlights UK small caps as a key driver of performance.

The portfolio has 15% in UK equities, holding Marlborough Special Situations and Liontrust Special Situations. On the latter, the director is planning to reduce exposure to lock in profits.

In Europe Gillibrand expects to slightly reduce exposure to the Baillie Gifford European fund.

‘This will be redistributed to my 11% position in the Old Mutual North American Equity fund, on the back of an uplift in sentiment,’ he explained.

He also anticipates reducing the model’s 12% allocation to the First State Global Property Securities fund by around 5% on a worsening outlook for the asset class.

‘Property now looks less attractive in terms of returns and the asset class’s future looks less bright.’

In Japan, the team has participated in the market bounce through a 5% allocation to the Legg Mason Japan Equity fund.

The strategy’s UK corporate bond allocation currently stands at 26% and Gillibrand anticipates this position won’t change significantly in the near future.

While recent developments in bond markets have meant that returns are more difficult to generate, Gillibrand takes a balanced view of events. ‘The biggest challenge is now how to manage risk and this is pushing us to discuss risk with clients. This is no longer a safety net, and clients should know how much risk they are prepared to take.’

Performance

Over the past 12 months the model has returned 14.2% compared to a sector average of 15.2%.

UK equities buoyed performance and Gillibrand says particular mention goes to the 14.9% returned by Liontrust Special Situations.

‘What surprised me is that US equities were expected to do better than the UK. Instead, US equities returned 4% less,’ he added.

On the performance of the portfolio’s fixed income allocation, Gillibrand said: ‘What was a shock was M&G Strategic Corporate Bond fund’s performance, returning 23.36%. It was not a straightforward investment grade corporate bond play, instead big risks were taken, which luckily gave those returns.’

Conversely, Asia Pacific equities and global emerging markets detracted over the period, as US central bank policy weighed on countries with current account deficits, but Gillibrand says this was to be expected given the historic relationship between the two.

Looking ahead, he expects the region to fare better, despite lower growth forecasts for China. ‘Although the region has performed less than it might have done previously, it is still growing. We shouldn’t throw the baby out with the bathwater just yet.’

In the US, where markets have experienced a strong run over the past few years, Gillibrand anticipates good news to follow the announcement that Janet Yellen will replace Ben Bernanke as chair of the Federal Reserve.

‘Markets like Yellen as she seems pro-quantitative easing. We could see some good pickups,’ he explained, adding that global equities could also benefit from stronger US markets.

Gillibrand anticipates cash to be a drag on global performance, as he doesn’t expect rates to rise in the ‘foreseeable future’.

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