While there are many different approaches to equity allocation in this business, the overall consensus on how to invest in this asset class seems nebulous. More than ever, now could be the chance for active stock pickers to take the lead as the investment pathway for equities proves less straightforward than last year.
A cloud over Europe
A relatively easy choice for investors through most of 2013, European equities took on a large chunk in investor portfolios. This year, with crawling growth and the threat of inflation putting the wobbles on European markets, they are a less obvious stock to hold. The macro issues within the Eurozone are not going unnoticed and investors are opting for new routes of navigation around the risks and opportunities. But finding an alternative is proving tricky.
“We are moving towards large caps, which are reining in to focus on shareholder value and returns. We’ve reduced small caps and have liked the energy sector so far all year,” Guy Foster, head of research at Brewin Dolphin, said.
He added that slow growth of less than 1% in the Eurozone is no great surprise.
“We are slightly overweight in European equities and very overweight in the US.”
Simon James, director at Gore Browne Management, points out that most assets are slightly expensive at the moment.
“The issue is whether equities are at a reasonable value relative to other asset classes. We have slightly more cash than normal despite the fact that returns on cash are zero.”
He is underweight European equities without being overweight in anything else.
“People are relatively calm about the Eurozone but there is potential for that to deteriorate,” he warns. Overall, he has increased exposure to global funds, which invest in multinational companies.
The case for large caps
Reflecting on what Foster and James have said, there does seem a trend towards increasing exposure to larger companies. The hunt for yield continues and investors still want to be in equities, but they are searching for a profit in larger companies.
Quilter Cheviot’s chief investment officer Duncan Gwyther highlights this shift in equity content.
“At the start of the year, we started taking assets out of more risky allocations. In the past two to three months we backed off from high value stocks such as social media and tech stocks.”
Picking the winners
Concerns about Eurozone recovery, coupled with expensive European stocks makes for a tremendous stock-picking challenge. There is not much leeway in other markets – the general consensus on emerging markets is that it is still too early but with promising outlook in the months ahead. Across the Atlantic the US is showing a more robust economic recovery but not without concerns – from uncertainty around Federal Reserve policies to fear of overvaluation of stocks this too is not a stock-picker's picnic.
