As 2015 draws to a close, there is always the temptation to go into outlook mode in terms of what will drive managers’ future asset allocation. City Asset Management’s (CAM) head of research, James Calder, however has no view on 2016, much like he did not allow the start of this year to shape his views on the prospects for various different asset classes.
This is not to say he is not looking forward –far from it – he just does not use annual milestones to have epiphany moments. CAM runs money for 1,200 clients and offers bespoke discretionary portfolios, the majority of which are managed on a real return basis through an investment cycle, withCPI-plus being the most popular target. It also manages a fund-of-funds offering that replicates its CPI plus 2% and 4% bespoke offering and six risk-rated MPS models on a number of platforms including Aviva, Axa, Elevate, Transact, Old Mutual and Novia.
Calder is responsible for the investment process and chairs CAM’s asset allocation and portfolio construction meetings, as well as directing research opportunities. He says: “Rather than have a view on what will happen next year, our current view on asset allocation is a continuation of the same themes we have been following for some time, which is namely being conservative.”
Rifle shooting
This means he is not conservative when it comes to asset or allocation or the types of funds CAM will hold, adopting a long-term positive stance on equities. However this is anchored with degrees of caution within the various portfolios, and over the course of 2015 he has become much more positive on a “rifle-shooting perspective” cutting exposure to a number of equity asset classes.
For example, in the spring he cut exposure to emerging markets to zero, from a 6% weighting in the balanced portfolio CAM manages (CPI plus 4%), while the Asia-Pacific weighting was also cut substantially. “A collapse in commodity prices, the strength of the dollar and the potential for a US interest rate rise have all combined to make the short to medium-term outlook for emerging markets very poor,” he says. “It is an area we continue to look at in terms of when to go back in, but at the moment there are simply too many negatives.”
Turning Japanese
On the flip side, Calder has spent this year building his weightings in both Japan and Europe. Having adopted a zero weighting in Japan for a number of years, in the fourth quarter of 2014 it was increased to 3% in the balanced mandate, and since then it has increased to 7%.
“The reason for this positivity is nothing that hasn’t been said before,” he says. “There is a lot of stimulus taking place from the Bank of Japan and you are seeing corporate change take place, with returns on equity becoming a much more important part of the overall return profile. “While the road along the way will be bumpy, we are also hopefully moving in to an inflationary environment from the deflationary one [that has dogged Japan for years], valuations look very attractive and we are seeing earnings upgrades.”
Calder holds the JO Hambro Japanese Dividend Fund as part of his theme of taking yield wherever he can find it, alongside Chris Taylor’s Neptune Japan Fund. “The Neptune fund has had a tough 12 months but it is still one of the best performers in the sector over the past 10 years,” he says. “In an area that polarises a lot of people, Taylor has strong views on Japan and is the only manager we know who takes currency views at the fund level, either through hedging or not hedging the yen.
