Whitney George, co-chief investment officer at the asset manager, said the rush towards the safety of US government bonds has led to bubble-like conditions developing in this area of the market, comparable to what happened with internet-focused stocks in the run up to the millenium.
“During that period, it was greed driving the one-way trade into internet stocks at the expense of regular businesses. There is something similar going on now, only this time, after some tough years, it is fear driving people to the perceived safety of 10-year treasuries,” he argued.
“You cannot predict when it will turn, but when it does – and it will probably take a combination of rising rates and some clarity from governments on policy – it could go the other way for a long time, as evidenced by our success from 2000 to 2007. We are big believers in mean reversion.”
George also claimed this has led to cyclical US sectors such as technology, industrials and natural resources being “overly punished” to the point where attractive investment opportunities are emerging.
“For the time being, it seems to be a one-way trading environment – a preference for US treasuries and distaste for just about everything else, particularly smaller companies and those with economic sensitivity,” he argued.
“We are long-term investors and believe the market has overly punished more cyclical holdings including those in technology, industrials and natural resources where we are consistently finding great values.”
The £166m Legg Mason US Smaller Companies Fund, which is managed by Royce & Associates, is currently overweight industrials, materials and energy while maintaining an underweight to healthcare and financials.
