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creating a 21st century portfolio

Expert Investor Europe assembled an expert panel to tackle these questions.


Dylan Emery, Expert Investor Europe: What do you make of the past five years and should we change our opinions about how the world works?

David Greene, Pioneer Investments: When I think about where we’re going, I like to start by thinking where we actually are at the moment. I’ve been in markets for 25 years and I spent the first 20 years learning about the effect that economic statistics, when central banks speak, have on markets. I’ve had to not quite throw that out the window, but I’ve had to learn to listen to what the politicians are saying, because they’ve been probably the biggest rivals of markets in the last three to five years. So if I think about what has changed for me, I think about economics maybe not second but certainly on a par with politics. So politics, for me, is one of the big changes in the past five years.

The panel

David Greene

Client portfolio manager, Pioneer Investments

Suzanne Hutchins

Alternate manager, BNY Mellon Real Return Fund (€), Newton

Phil Milburn

Investment manager, fixed income, Kames Capital

Andrew Milligan

Head of global strategy, Standard Life Investments

Thomas Price

Managing director and senior portfolio manager, Wells Capital Management

Aled Smith

Fund manager, M&G Investments


Andrew Milligan, Standard Life Investments: The situation is similar to the ’70s in the following sense. In the ’50s and ’60s we had a stable environment in the world economy and a stable political situation. The ’70s, though, was the time of transformation. We had an enormous number of shocks, we decided that we weren’t going to be Keynesian, we were going to be monetarists. We had ‘Thatcherism’ and ‘Reaganism’, and in the ’80s and ’90s we entered the ‘nice’ decade of continual expansion – inflation under control, and all asset prices did well in that disinflationary environment. We are similarly now trying to work out what the economic regime is going to be. The investment conclusion I worry about most, is that we are losing control of inflation in the major economies around the world.

DE: Are we underestimating the danger of inflation?

AM: We have no idea what quantitative easing [QE] will eventually do. Again picking up the point, politicians are in charge – we no longer have independent central banks. They are simply arms of the ministry of finance now. And so how much QE, and what sorts of inflation we’ll see, is incredibly uncertain. Central bankers around the world will tell us that they will not allow inflation to appear but they’re paid to say that.

Phil Milburn, Kames Capital: We’ve spent the past five years going through the most fantastically interesting markets we’ve ever seen. We’ve also seen the biggest sell-off in credit; we’ve seen the biggest rally ever. A lot of the beta, a lot of the value, has been squeezed out of fixed income – in government bonds, where we are in a world of financial repression. Also in the credit markets, we’ve seen a rally there. It’s that desperation for yield – people have been forced to take more risk. Central banks are forcing everybody to take more risk, in order to get that income. At the same time we’ve got the ageing population. What are we saying on fixed income? With the beta squeezed out of a lot of it, in the next couple of years fixed income managers are going to have to work a lot harder, be a lot smarter.

Suzanne Hutchins, BNY Mellon: What hasn’t changed is that everybody wants to make money, and preserve capital on the downside. A lot of that has been lost over the years in terms of benchmarks and specialist funds, etc. I do agree about politics, the uncertainty. But the other factor, which is a global phenomenon, is currency. We’re seeing a race to debase currency and protect national interests, as countries try to export themselves out of indebtedness, and try to grow. It’s another factor in terms of how you diversify a portfolio and look to make a return. I’m not entirely sure things are that different in terms of market psychology and behaviour. And perhaps we are going into another serial bubble – being financially repressed out of assets that don’t yield anything, into forcing ourselves to take on risk. So I’m more at the bullish end of gold and real assets, because that’s where you can preserve capital.

Aled Smith, M&G Investments: I’d say two things. First, how do governments get out of this regime we’re in? [By making] financial repression a deliberate policy – negative real rates for some time – and forcing people to make decisions that get governments out of the debt problem. There’s an optimistic outcome of that though, which is that inflation doesn’t go up because wage growth doesn’t go up. And if that doesn’t happen, it’s just inflation expectations that go up. That’s what we saw last year in the US. I think it’s already started and that is a really good environment for equities. So you see a re-rating of equities and the big thing that’s changed in the equity world is earnings. Share prices are the same as the bubble of 2000, but we’ve got twice the earnings per share. Also, don’t underestimate how price changes psychology. Because the thing that everybody has got out of, is risk and volatility. There’s a 71% correlation between low-beta equities and the ten-year Treasury yield – people have basically got bond-like equities. So the thing that will change, in my opinion, is that people will take on volatility and take on risk as an asset class.

Thomas Price, Wells Fargo Asset Management: The yield environment is clearly the [biggest change] over the past five years. A month ago we set new all-time high prices, all-time low yields in the high yield market. So it suggests investors need to change their return expectations for taking risk as they move up the credit curve. We all know that can continue a lot longer than people expect it to, but it’s been a major change. If you go back though, we are where we were six or seven years ago, when we had a low yield environment and we’re just now picking-up on the additional leverage from leveraged buyouts [LBOs], etc., that we had, that caused part of the high yield bubble to pop. And I think the question is: are we going to see that again? We have seen a pick-up in LBOs, although I would say that the ones that are in the headlines right now – Heinz, Dell – are somewhat unique, because you have strategic investors. With Heinz you had Warren Buffett putting in a big slug of preferred, which was unique. And at Dell, you had Michael Dell using his own shares and Microsoft putting money in. So they are more strategic transactions than normal. If we start seeing more standard LBOs, then I’d be more concerned that we’re near the end of the cycle for high yield.

AM: To pick up one of Aled’s points, profits are very high – which of course is extremely good for stock markets – and we know that the US profit margin is at a very high level. But again, I come back to this point about politics, and what we’re beginning to see governments doing. ‘Trust’ is a very important word, and out there in the general population they are not trusting banks, they’re not trusting financial services. We’ve just had the financial transactions tax, we’ve had the bankers bonus in the European parliament, we’ve got the Swiss referendum. You can see how people are saying: ‘Those companies are making money, those banks are making money. I’m not seeing any benefits from it.’ So I think the danger of profits at this level is not so much that they may be competed away – although that may be – but actually governments start saying: ‘There’s a pot of cash there – you’re not putting it to work, we want some of that.’ And it’s the taxation side which again comes back to how politics are very different than even just a few years ago, when this was free-market economics and we were all very happy indeed if bankers made large amounts of money.

DG: I see elements of a bubble in virtually every financial market today. We’re circling around the same situation, which is there is a huge amount of money being pumped into markets by financial authorities, state agencies, official bodies. When you get that amount of money being pumped-in, risk is what you pay for. Prices go up or bond yields go down. I’m reminded of something one of the ex-Citigroup chief execs, Chuck Prince, said: ‘While the music is playing, you have to be on the dance floor.’ And we’re all dancing around the dance floor, hoping that just before the music stops we’re going to be the ones that will get off the dancefloor quick enough. But we all know there’s a lot of people in this room, there’s very skinny doors, and when the time comes to exit we’ll not all be able to get out. So going back to getting something from your portfolio manager, that’s one of the key themes over the next two years. We can talk about absolute returns and whether they can protect you. But the trick will be, what is your fund manager saying to you, about how he can get you out of a potential situation that we probably all know is going to come?

PM: On the global government bond side – and this is one of my favourite stats – US Treasuries had a worse total return in 2009 than 1994 and have done almost nothing since. So we all know it’s expensive but it’s not the great bubble everyone thinks it is. The bit we have to worry about is the corporate bond side – if there ever is that mass exit – either in high yield or investment grade. But the huge sell-off in fixed income that everyone keeps predicting isn’t going to come in a hurry.

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Part of the Mark Allen Group.