“The big observation that we are making at the moment is we don’t like fixed income assets. In particular, yields are low, so we’re significantly underweight or short duration fixed income assets,” Moran, who co-manages the firm’s dynamic and conservative mixed-asset strategies, told Expert Investor sister publication FSA recently.
Bonds in most developed markets, including Germany, France, the UK and Japan, offer low levels of yield, according to Moran. Ten-year German government bonds, for example, have yields of 10 basis points a year.
Because of Moran’s views on fixed income, the firm’s dynamic mixed-asset product has a higher allocation to equities, which is at around 48.5%. Fixed income assets only account for 10% of the portfolio. The remainder is in cash.
The firm’s dynamic mixed-asset strategy has the flexibility to allocate 20-60% in equities, 0-80% in fixed income and 0-20% in alternatives, including real estate and infrastructure assets, according to Moran.
His views are consistent with the portfolio allocation of the firm’s conservative multi-asset product, which allocates 0-100% in fixed income and 0-35% in equities. At the moment, the product’s allocation in fixed income is also at 10%, while equities take up around 28% of the portfolio.
“Just because the mandate or product design [allows higher allocations to fixed income] doesn’t mean we suddenly love fixed income assets in the conservative portfolio. That would be very inconsistent for us as fund managers to say we hate it in one fund but we love this on the other fund, especially if the same people are running the two funds.”
Despite his negative views toward fixed income, Moran sees opportunities in emerging market bonds.
“With the Fed tightening and raising rates, there was significant amounts of pressure on emerging market bond valuations and currencies, which damaged the asset class last year.
“A lot of that negativity was overdone, so actually you are getting pretty attractive levels of yield today for investing in a number of these emerging market bonds,” he said.
Pictet Wealth Management shares the same view. David Gaud, chief investment officer for Asia, believes that the returns of several sub-asset classes within fixed income are not yet attractive. However, he finds opportunities in emerging market local currency bonds.
Moran believes there are “fantastic opportunities” in global equities, given that prices have fallen last year. In 2018, the firm’s dynamic product increased its allocation to the asset class to around 56% in December from around 38% at the beginning of the year.
“At the start of 2018, people were very excited with equities, but valuations [in global markets] were starting to look very expensive. Sentiment shifted and the price fall that we saw over the course of the year led us to become more attracted to equities,” he said.
Moran explained that his stock picking focus is on company valuations.
“Our preference is to make an assessment of what the market is already pricing in – so how the market has valued the company – and then make an assessment whether that valuation is justified by what we have observed in the fundamentals.”
Given that focus on valuations, Moran noted that the dynamic product’s equity allocation has gone down to 48.5% from December.
“Given the subsequent recovery that we have seen in the first six weeks of the year, we started to scale back our equity weights.”
Within equities, Moran has a preference for Asia, particularly in Hong Kong, Korea and Taiwan, where valuations are cheap.
Moran also likes Europe, where sentiment is incredibly negative at the moment.
“Europe is a standout case in terms of valuation and negative sentiment. From an earnings perspective, it is not bad, so we think there is a lot of potential upside there.”
M&G’s Conservative Allocation and Dynamic Allocation funds versus their sectors
Source: FE Analytics
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