‘The outlook is not appalling,’ is hardly the most positive way to open a financial article. But Charles Hepworth clarified: ‘We haven’t at all gone bearish, although it’s hard to see a repeat of the exceptional returns of 2017.’
For the investment director of managed portfolios at GAM, equities were a key driver of performance last year. ‘Our equity holdings were up around 20% in 2017,’ he said. ‘They were driven by a combination of bullish investor sentiment, emerging markets and Japan.’
Indeed, Hepworth said Japanese equities were a ‘standout returner’ in 2017. And the GAM Star managed portfolio service (MPS) range was overweight Japan.
But he added GAM’s portfolios also benefited from the style and sector positioning of its two domestic-focused mid cap Japanese holdings. These are: the Coupland Cardiff Japan Alpha fund, run by Citywire A-rated manager Jonathan Dobson; and the JP Morgan Japan fund, run by AA-rated trio Shoichi Mizusawa, Miyako Urabe and Nicholas Weindling.
The GAM Star Balanced fund currently reflects what Hepworth calls ‘our medium-term positive view on technology, which is really the only growth opportunity in the slow-growth environment we’re in’. The fund holds the in-house GAM Star Technology run by Mark Hawtin. But other broader fund holdings also have a technology bias.
Take the Loomis Sayles US Equity Leaders fund, run by A-rated Aziz Hamzaogullari. ‘Fangs stocks [referring to Facebook, Amazon, Netflix and Google-owner Alphabet] were a key overweight position for this fund,’ said Hepworth.
The investment director said the in-house GAM Star Asian Equity holding, run by Michael Lai, is similarly positioned. Chinese technology group Tencent is its second top position and 44% of the fund is technology-related.
Despite the technology wobble following the Facebook and Cambridge Analytica data breach, Hepworth remains positive on the sector. ‘Technology companies are genuine growth companies in top positions and account for much of the overall market performance,’ he said. ‘You ignore them at your peril.’
The GAM Star Balanced fund, which we benchmarked against ARC Steady Growth due to its risk profile, sold down US equities by 1% in the past year. ‘We wanted to go into regions with a recovery path that’s likely to pick up,’ said Hepworth. ‘You could argue the US is at a later stage of the business cycle.’
UK equity allocation also fell by around 2.5% in the balanced fund, related partly to Brexit uncertainty and unspectacular economic performance. ‘Also, we’re offering a more global product. So a UK bias is not warranted,’ Hepworth explained.
An even more significant underweight is absolute return. At time of writing, it was at 5% in the balanced portfolio, against a neutral position of 10%. ‘Many target absolute return strategies have shown negative returns in the year to date,’ Hepworth added.
‘There are periods when they find it hard to maintain positive performance: when you get regime shifts in markets, and it’s not so obvious where alpha opportunities lie,’ he said.
But the portfolio uses the in-house GAM Star Absolute Return Macro fund in fixed interest, run by Tim Haywood and Mark Dragten. ‘We like the flexibility. It’s not strategic bond. Rather, the mindset is to make money irrespective of what the fixed interest market is doing.’
The balanced portfolio currently has a 31% allocation to fixed interest, which includes 6% cash. This is slightly above the neutral 30% allocation. But Hepworth is avoiding western sovereign debt. ‘We don’t think it offers much upside, as the path of rate policy in the US is up from here,’ he said.
In alternative assets, the portfolio currently has a 3% allocation to gold, via the
It is good to know the investment director has selected some holdings for the possibility the outlook really does get appalling.