‘There are lunatics in charge of some countries,’ says B Capital founder Lorne Baring, outlining one of the three key risks he has identified for markets.
The company’s two funds –Global Growth and Global Absolute Return- are approaching their first anniversary next month and performance has been solid, weathering the macro challenges.
But Baring is mindful of ‘known unknowns’, citing China’s debt mountain, the risk of a monetary policy error, as the other key threats, along with geopolitical tensions.
‘China’s debt to GDP ratio is 280% so there is a risk of a blow up if growth slows, but GDP growth for the third quarter came in at a better than expected 6.8%, which is reassuring,’ he says.
‘We are also reassured by the rising price of commodities, such as copper. This means the consumption story is still there, which is good for producers and emerging markets generally.’
While conscious of the threat of central bank policy mistake, mainly the danger that one raises interest rates too sharply, this is not his base case. Although central banks around the world are keen to normalise rates, the ‘lower for longer’ mantra remains, meaning rates will likely edge up slowly in the US and UK.
The most unpredictable challenge to navigate remains the political landscape, particularly the ‘lunatics’, with Baring more concerned about Donald Trump than Kim Jong-un.
‘At least the one in North Korea has been doing it for quite a while. The other one in the US is learning on the job with his mobile phone in his hand. Policy by Twitter is indicative of the novice nature of the beast and is the topic of discussion with many of our investors,’ he says.
‘If [US secretary of state] Rex Tillerson goes, he will be one of many to have left Trump’s team and you have to wonder what is going on.
‘Knowing the un-knowable is impossible however and we have to consider that there is a more experienced administration and Congress there to keep the checks and balances in place.’
In the Global Growth fund, Baring is overweight Europe and emerging markets, favouring Asia, commodities and underweight the dollar.
‘It is also worth considering the effect of dividend yields in the current environment. Collecting dividends on an ongoing basis adds to the investors’ total returns and over time makes an important contribution,’ Baring said.
‘So, in a period where bond yields are still at significant lows the attraction of higher dividend yields is evident and explains the sentiment of ‘holding on’ even where pundits are regularly warning of the demise of the bull market. In all likelihood, holding equities will over the long term remain the driver of growth in the portfolio.
‘It’s been an unpopular bear market, but that’s because people have been underinvested and they wish they’d invested more.’
The Global Growth fund is up 16.03% from launch over the 11 months to the end of September, with Global Absolute Return up 4.93% over the same period.
The Global Absolute Return portfolio is run as a fund of funds, with six holdings currently –Trojan, Ruffer Total Return, SLI’s Gars, Aviva’s Aims, JPM Global Macro Opportunities and Polar Capital UK Absolute Equity.
The fund is small at $7.7 million (£5.8 million) and Baring says the number of positions in it will likely edge up as it grows.
‘The funds are small as we haven’t been marketing them while we build up their track record,’ he said.
‘With the Global Absolute Return fund we have put together a good stable of managers. Ruffer and Troy are very defensive, Aims and Gars are more neutral and Polar Capital and JPM have done brilliantly.
‘If things turn, maybe they won’t do so well, which is why we have a blend. As we attract more money, we will look to add more, but we don’t want too many to diversify returns- six to 10 is absolutely fine.’