The models are populated by the portfolio construction committee, chaired by Oliver. He is slightly underweight the UK, more or less at benchmark for the US, neutral Asia and Japan, though he did add to Japan by 2.5% at the end of last year through an MSCI Japan hedged Ucits fund.
This course could be one to steer for a while given the lack of any clear drivers of change on the horizon. Cuming cites the conversations that we were all having last year about the US and UK normalising while Japan and Europe pushed on with QE. The US normalising has, so far, meant one interest rate rise, so conversations have now turned to when the second rise will be announced.
This could come about if inflation ticks up, with Cuming commenting: “Inflation is something we ought to keep an eye on, because oil is not going to stay at $40 (£28) a barrel forever and we know that the global authorities would very much like to see inflation pick up.
“They are going to lag behind, rather than lead, in terms of their interest rate policies as they do not want to be accused of killing this anaemic recovery. Wage rates are picking up a little bit in the US and the present subdued inflation outlook could deteriorate very quickly.
“Unemployment has fallen to 4.9% and the US consumer has been responsible as they have banked half the oil price bonanza and spent half, so the US consumer is positioned to be supportive of the economy going forward as confidence is okay.
“Although most people think that the US economy will continue to be constrained by a strong dollar, we still find it a relatively easy market to own, although its near constant relative outperformance versus other major markets since 2009 cannot continue indefinitely.”
There are Cuming’s natural caveats such as a “not particularly good” US earnings season and a strong dollar hurting exports, but overall US and European consumers are growing in confidence and global growth of 2.5% for 2016 is not to be looked down on.
“We are going through a slightly dull period in financial markets. In the short term, there does not seem to be any reason for markets to rally significantly, we need further evidence regarding earnings and that recessionary risks are diminishing before we can push on. I think it is a year where it is going to be quite hard to carve out returns, especially in the first half.
“Most of the stock market charts look tired. You can see markets starting to roll over from mid-way through last year, culminating in the strong setback we’ve seen. The charts at this level are quite ambiguous.
“You could say that the setback was a fine buying opportunity, but given the speed of the rally we now need to consolidate for a while and we will most likely get a better opportunity to increase equity exposure should that be our mind set.”
Cuming started his career in the bond market, so we believe him when he says: “The bond market is smarter than the equity market, and if the bond market is telling us anything at the moment, it is to be careful.”
In terms of his fixed-income exposure, he describes government bonds as “the only true diversifier of equity market risk”, so while he owns them for this reason, he prefers US treasury inflation-protected securities for inflation protection, rather than UK index-linkers.
He also owns strategic bond funds from Kames, Jupiter and GAM, adding yield through infrastructure exposure, thanks to Lazard Global Listed Infrastructure and two closed-ended vehicles, Renewables Infrastructure Group and HICL.
The one big topic missing from this allocation conversation is emerging markets.
“It is too early,” according to Cuming. “There is going to be value out there and I am sure some smart people are buying it now. We’re more or less happy with our present equity market weighting so while it is on the radar, I think it is still a little bit too early.
“There is probably a compelling case for direct Indian investment at some stage and we are looking at one or two funds. I would not rule out investing in China but the greater transparency of India, relative to China and the better demographic outlook means I personally would be happier with India.”
As Cuming says, there are simply not many golden investment opportunities right now at a price worth paying to help reframe his investment view, so he is happy to be positioned around the benchmark.
He says: “We will respond to developments as they occur.”
