Defensive investors Seneca Investment Managers have further slashed their exposure to shares and taken new positions in perceived safe haven gold funds to prepare for a ‘global slump’ starting next year.
The multi-asset managers invest in a wide range of shares, bonds and specialist assets through its Seneca Diversified Income and Seneca Diversified Growth open-ended funds as well as the Seneca Income & Growth (SIGT) investment trust.
For over two years, the value-tilted fund group has been cutting its exposure to equities as it believes markets are near the end of the investment cycle.
Peter Elston, chief investment officer at the group, said evidence was mounting that the global economy was ‘approaching a downturn’ despite worries easing over recent months on the back of a more dovish tone from the US Federal Reserve and hopes that quantitative tightening from central banks will be put on the back burner.
However, Elston is maintaining that investors need to gradually prepare for a ‘global slump’ that he believes will start ‘around the beginning of the next decade’ and has moved increasingly underweight in equities since the third quarter of 2017.
Last year the group cut US equity exposure to zero on the basis that the region was the ‘most advanced in the business cycle’ and Fed monetary policy was likely to be based on upward pressure on core inflation and low unemployment rates despite falling headline inflation.
‘The US is very obviously expensive and on a price-to-book ratio of three times, and the rest of the world is on one-and-a-half times,’ said Elston.
‘Some of that is justified – the US has a dynamic corporate sector that deserves some sort of premium – but a 100% premium I’m not so comfortable with.’
He has also reduced allocation to the UK but admits that ‘it’s a tricky one’ as from a business cycle perspective ‘there are reasons to start reducing’ but from a ‘market valuation perspective things have been coloured by Brexit’.
‘We have been reducing in the UK but maybe not as much as we would have done [without Brexit pushing down valuations],’ said Elston.
In order to shield the funds from what Elston (pictured) believes is an imminent downturn, he has taken two new positions in gold funds. Both the income fund and growth fund, as well as SIGT all now have positions in Investec Global Gold and the Invesco Physical Gold exchange-traded commodity.
‘It is very hard to find safe haven assets at a reasonable valuation,’ said Elston. ‘Safe haven bonds are horribly expensive, so we have had to look elsewhere. Wanting to find safe haven investments reflects our warning that we are approaching the end of the cycle.’
He added that the gold funds were held in the funds’ cash allocation as it is a ‘form of cash’.
‘It is more attractive than cash when central banks are debasing currencies, as they will when the downturn happens,’ he said.