This view on Europe was formed relatively recently, with the US holding sway until the turn of the year. “For the preceding four years, we were overweight US equities, but early this year we made the move out of the US and more into Europe,” Mulford says.
“The US has seen a five-year rally in earnings and asset prices, but it’s not that we think the US is going to stall, it is just that there is more upside in Europe now. When we started to go overweight we got 20% of the currency depreciation coming through.
“For every 10% fall in the currency, we estimated that European earnings would get a 4-6% boost and that has proved accurate.
Putting that into the picture, Europe has delivered double- digit earnings increases and we see it continuing.” Next in Mulford’s favourites list are Japanese equities.
“We like Japan for the earnings outlook, and also the corporate reforms under way. Our thesis on equities is that the easy money has been made as I said, with price-to-earnings ratios not expensive but trading above long-term averages.
“We don’t think re-rating is the main driver of returns, it is about earnings growth. The earnings climb in Japan is coming from a similar combination [as that in Europe] of central bank stimulus and weakening currency, but also there is this shift in corporate behaviour, which is helping profitability and new investment coming into the equities market from institutional investors like pension funds.”
In the classic active versus passive management debate, Mulford says there is a role for both but has more enthusiasm than most for the merits of active management.
“Last year, active management got a pasting, with people saying let’s sell off active funds and get into low cost passive trackers,” he says. “But this year, active managers have made a comeback. There are areas in which we use passives such as the US, but even there, there are cases where you need active management, such as small caps. In our US allocations, 60-70% is passive exposure and 30-40% active management,” Mulford adds.
The less favoured sons in the asset class spectrum for Mulford include UK equities and emerging markets. “Our underweight calls include the UK and emerging markets. That is linked to the fact that going into a US Federal Reserve rate rise, emerging markets are under pressure and the dollar is strengthening, which is putting pressure on commodities.
The last thing emerging market economies need is an indirect rate rise. “Then you have the fact that the UK market has a big commodities element and has companies that draw a lot of revenue from emerging markets generally. Earnings growth for the UK is not looking as positive as in Europe,” he says.
“Government bonds is our biggest underweight,” Mulford continues. “Bond yields clearly don’t offer great investment opportunities. We haven’t sold gilts entirely, as we think they have a role to play is offsetting risk. The money that has come out of gilts has been largely split between equities and high-yield credit.
“We recently cut back on US high yield as there is quite a high proportion in the energy sector, which is under pressure. We have also been broadly reducing duration to cut interest rate risk in the portfolio.”
