Black espies a glimmer of hope in the fact that 10 year US treasuries are beginning to offer a bit of value on the back of the Fed’s incremental rate rises, but the risk of losing capital in bond markets if inflation spikes is a gamble too far for him.
On the defensive
The firm has reduced equity exposure during the past three or four months because volatility has been at such low levels and valuations have been stretched. Black observes that in every year since 2009 the market has seen a fairly significant correction peak to trough, but this has not been the case for more than 18 months now, which he finds disconcerting.
“Volatility has fallen consistently for well over a year to what we think are concerningly low levels,” he says. “It indicates there is something around the corner.”
Black is not overly worried about valuations, saying: “If you price equities on the risk free rate of return, the equity risk premium is not historically expensive. It is not cheap either, but it is fine.”
He believes equities are the best asset class for the medium to long term, but, for now, especially in multi asset portfolios that have a target return objective, it makes sense to be defensive. For this reason the firm’s allocation to cash has risen.
Despite stretched US valuations, Black says the region “always looks expensive” because it is the most dynamic economy in the world, has a mobile labour force and well managed companies.
“For us, it is quite a thematic pond to go fishing in. We probably still have over 40% of our equities in the US at the moment.”
This thematic approach is at the heart of the firm’s equity investment ethos. Broadly speaking, the firm identifies and invests across themes it expects will be robust in all economic circumstances for the future.
These consider demographic change, dietary change, advancing technology, and the impact of human behaviour on the planet.
“Those are the trends we want represented in our portfolios,” says Black. “We don’t start our stock selection process by saying ‘how much do we want in America?’ We say, ‘how are we going to represent these themes in our portfolio?’”
