If an investment manager were to look at Schroders’ multi-manager portfolios now, they might understandably conclude that Marcus Brookes and his team’s short-term view is as bearish as bearish can be.
For the past 18 months, Brookes has clung to cash and shunned bonds across the suite of Schroder Diversity funds he manages. The lowest-risk portfolio in the series, Schroder MM Diversity, currently holds 26% in cash, 99.9% of which is sterling. On the riskier side of the spectrum, MM Diversity Tactical fund contained 28.2% cash versus 48.8% in equities as of 31 October 2016.
“Cash over bonds is absolutely the place to be,” he says. “I know I come across as the world’s biggest bear, but I’m just very short fixed income.”
On the contrary, Brookes claims his outlook for the global economy is relatively optimistic. The reason for his anti-bond stance lies in his prognosis that 2017 will be marked by inflation that is surprisingly on the high side for at least a few quarters.
Predicting the investment environment always prefaces fund selection for Brookes during the allocation process because, if you get that right, “you can forecast the type of portfolios that are likely to outperform or underperform”, he says.
“If you believe you are going into a bear market, it is pretty obvious you would want to find the most defensively positioned fund for that backdrop.
“There is very little point in reasoning that your favourite UK equity fund is ‘XYZ’ and if you’re bearish on the UK market, you buy slightly less; and bullish, slightly more. We think you may actually need to change the fund you invest in.”
And, right now, Brookes’ forecast reads inflation but it is the ‘good kind’, where wage growth makes rising prices tolerable, encouraging consumer spending and further economic growth.
Pies and prejudice
According to Brookes, the ‘lower for longer’ scenario has been a disinflationary trade. “We’ve all been worried about tipping into a sort of recession or negligible growth rates but, in reality, we’ve had OK growth rates.”
He likens this contemporary bull cycle to pastry. “If you’re making a pie, you have a certain amount of pastry, which you can roll quite thick to make a nice, dense crust pie. But if you need to make two pies, then you can roll it really thin to accommodate two.
“Similarly, we are seeing an elongated economic expansion because the growth rate that is being delivered is pretty low. You get the same quantum of growth; it just takes longer to accumulate it.”
Against this economic backdrop, Brookes is not predicting for a global recession in 2017 but warns that it could happen within the next couple of years.
The intervening period, meanwhile, presents “a good opportunity to reset people’s views about what the future holds for us”.
Brookes hopes a more inflationary economy could prompt a revaluation of the ‘safe’ assets and “stimulate capital to flow out of dull investments into the real economy.”
