Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Steve Waddington, co-manager of the Insight Investment Diversified range of funds.
Economic data and corporate profitability imply that the global recovery is gathering pace. This should support risk assets for now. But markets will have to face up to the removal of stimulus and governments cutting their debts. This may be a challenge for some asset classes. So we think investors should diversify their holdings across a range of asset classes. This allows you to benefit from gains if markets keep rising, but also means you are insulated to some extent from market falls. Three areas where our portfolios have core holdings are: convertible bonds, small-caps and Asian stocks.
One of our core themes is to reduce downside risk, while still reaping the rewards of risk assets continuing to do well. One asset class we like in this respect is convertible bonds. Convertible bonds can offer the upside potential of equities, combined with the downside risk protection of bonds, thereby delivering attractive risk-adjusted returns. Forced sales by hedge funds during the financial crisis meant that prices have been artificially depressed, creating an interesting investment opportunity. We have exposure to this through a holding in the M&G Global Convertibles Fund (020-7626 4588), which looks well placed to profit from current market conditions.
We also like smaller companies. In an improving economic environment, we’d expect small-caps to outperform larger companies. Also, they tend to be less well researched, which means they are more liable to be mispriced. So stocks with compelling balance sheet and cash flow positions can offer appealing upside potential. To play this, one vehicle we use is the Baring European Select Trust (0845 082 2479).
The fund manager focuses on smaller stocks and sees greater opportunities for growth within the sector. To cut the downside risk, we have isolated the expected outperformance from the fund, using derivatives to remove the directional risk from the European equity market. This means our investors stand to benefit from any outperformance from the active management, but are less exposed to potential losses if the stockmarket falls.
A final area we’re looking to for growth is Asian equities. This is part of our theme of buying into investments that stand to benefit from long-term demographic change. Populations in Asia are very young, which means that regional economies stand to benefit as more and more people reach working age. The Asian population is also growing more rapidly than in many other regions.
Asian economic growth is, of course, currently higher than Western economic growth. Yet we believe that even after economic recovery is complete, the Western world will find itself being a lower-growth environment than it was before the financial crisis. This should make Asian growth look increasingly attractive in a relative sense, prompting more investors to move money from West to East.
One of the ways we are accessing the Asian growth opportunity is via the Schroder Asian Total Return Fund (0800-718777). One thing that makes this fund more attractive than many others is the fact that it can take short positions in regions that it views as being less attractive than others. This approach aims to provide the fund with better capital protection during sell-offs, but means individual holdings can take part fully in rallies. As such, we feel that this fund fits well in our multi-asset portfolios, offering upside exposures while keeping an eye on cutting downside risk.