Even though equities are no longer cheap, they are attractive relative to bonds and supported by a long economic cycle and cyclical uplift, Stopford said.
“[The cycle] started six years ago, but has been so drawn out and desynchronized that no signs of overheating have appeared,” he told Fund Selector Asia. “If that’s correct and the cycle has a number of years to run, that’s constructive for equities, which tend to peak late in the cycle.
“For a 1-2 year view, the preferred asset class is definitely equities,” said Stopford, who manages the Emerging Markets Multi-Asset, Global Multi-Asset Income and Global Strategic Managed funds.
However, a short-term market correction is likely in the cards, so he is not fully invested.
“The noise around Greece and China could cause a correction over the summer and we want dry powder to buy into any weakness.”
Specialised teams
Multi asset fund allocation is determined by forming a global economic view of positive, negative or neutral, which then becomes a skew toward growth or defensive assets, Stopford explained.
The firm’s investment team is made up of specialist researchers in various asset classes –equities, REITs, currencies, commodities for example – an arrangement that Stopford believes differentiates the firm from peers. At an ideas forum, the best ideas are pushed through and the ones that merit attention are identified.
“Most are strategic ideas, but some tactical and event driven.”
Assets uncorrelated with economic cycles such as infrastructure and non-financial assets like re-insurance are also included in the funds.
Positive signals in Japan
Although the current bias is toward growth assets, specifically equities, in the last couple months the fund has reduced equities from reasonable to modest overweight, he said.
The firm is cautious on the US market, with preference toward established technology brands that generate strong cash flow and distribute cash to investors.
Japan is the favoured equity market. Stopford believes both macro and corporate policies have aligned into a positive force, and in terms of valuations, Japan is the only major market that became cheaper last year.
“Earnings went up faster than the underlying share price and price-to-earnings came down.
“Another plus is that a lot of pension funds are in the process of divesting local bonds and re-allocating to equities.”
He likes Chinese equities overall, but has no A-share exposure. He prefers the MSCI China universe, which trades at only 10x forward price-to-earnings. “It’s less crowded and less speculative.”
Emerging markets equities are cheap, with a 30% discount on average, but he said they lack a growth catalyst.
“EMs are too reliant on the Chinese miracle and commodity price boom, and both have faded.”
He has also increased defensive exposure positions to benefit from an increase in volatility.
“We’ve exchanged some equity positions with options. We pay a premium to participate if the market rallies but exposure is reduced if the market falls. We’ve added hedges, short positions in unattractive growth assets such as Aussie dollars, which are a fantastic hedge on the equity market.”
Localising teams
Investec’s AUM is about $115bn with roughly $22bn in the multi-asset business.
About four years ago, the firm relocated three fixed income specialists to Singapore and two equity specialists to Hong Kong. At some point more people will end up in Shanghai or Shenzhen, Stopford said.
“For some time we had looked out from the developed world to emerging markets. With the emergence of China, we took a decision to put people out here.”
Global investors will eventually follow because currently “the world is too developed-market centric”.
He pointed out that a Western pension fund typically has only 5% invested in emerging markets, which already represent more than 50% of global GDP.
“That’s not replicated in indices yet but over time EM indices will catch up with GDP. It will end with a situation where people are massively underinvested in the emerging world and China.”
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Investec’s multi asset fund performance over the trailing three years, according to FE data:
