“There is a perception that Western government bonds, such as UK gilts, US treasuries and German governments bonds, are safe and provide good diversification if you get a risk-off event,” Finding, a London-based multi-asset portfolio manager at M&G, told FSA.
However, because they offer very low yields, Finding said he was worried that they could not deliver the same level of diversification that they had delivered historically.
“Monetary policy in its current form has done as much as it possibly can, so you’ve ended up with negative interest rates in [some] areas in Europe,” he explained.
As current policies reach their limits, the ideas behind global policy making have begun to shift, he noted.
Geographic diversification
Multi-asset managers can find more opportunities in global equities than in fixed income, Finding said. At the same time, targeting different geographies withing equity space can provide a better way to diversify a multi-asset portfolio.
Given the high valuations in developed markets, such as the US, Finding said he preferred to be active on the sector level. For example, he said that there was value in areas such as financials and technology.
“We are interested in areas where there has been a lot of trauma,” he said. “Even though the global financial crisis in 2008 was nearly 10 years ago, investors remember the experience of owning those assets and it wasn’t a very pleasant one.” The fundamentals have improved quite dramatically since then and financials are much less risky today, he said.
In Asia, on the other hand, there is value in the broader equity markets, according to Finding. This makes him look at the region on a macro or country level.
Finding said that Korea was one of his favourites, as it is one of the cheapest markets in the region at the moment, and also because analysts have been revising upwards their earnings expectations for Korean companies.
Finding said he considered Taiwan equities to be cheap. He also said he liked Japan, with its corporate profits environment getting better.
Greatest concern
Findings’ greatest concern in equity investment in Asia is the risk of permanent loss, such as confiscation and expropriation.
“The risks in emerging markets is the risk that you don’t get your money back because policy makers come and change the rules of the game, or corporations are owning businesses for a few insiders rather than their shareholders,” he said.
In Asia, China is an example of a market where investors are concerned about the risk of permanent loss.
This represents a significant difference from the developed markets in the West where regimes are more shareholder-friendly.
According to Finding, investors should check the rights shareholders have, how stable a market’s policy regime is and how friendly policy makers are to corporations.
However, there have been signs of improvement in the region. For example, Japan is becoming more shareholder driven compared to 10 years before, he said.
