Investment Quorum chief investment officer Peter Lowman is looking to ride the quantitative easing (QE) wave by building exposure to Europe and Japan.
‘It is what you own in Europe that is important. You should always look at stocks in the market rather than owning the market,’ he said.
‘If you take European equities as a whole, you can benefit from the central bank policies that are being run at the moment. You can benefit by being overweight in sectors like consumer discretionary and exporters that are benefiting from a weaker currency.
‘Those sorts of companies are primed for corporate profit surprises, regardless of Greece.’
‘[Baring’s] Nick Williams buys mid and small caps in Europe and which we think will benefit from the accommodative central bank policy and the weaker euro,’ Lowman said.
Following the theme of loose central bank policy, Lowman is also looking to Japan, where he holds the Baillie Gifford Japanese fund.
The flipside of QE-led currency devaluation is the potential for a further spike in the US dollar if investors lose faith in the euro, Lowman said.
‘A bull-run in the dollar could have harmful effects on US companies because those companies get a high percentage of their earnings through overseas markets. The dollar will be a strong headwind for them,’ he warned.
He has exposure to North America through the Old Mutual North American Equity fund. Although he does expect interest rates to start rising soon, Lowman does not believe it will cause much uncertainty for the markets.
‘They will go up in small percentages through one or two years, and in the US rates are going to be around 2% and 2.5%, which is nowhere near the norm.
‘The new norm is going to be much lower. If the Federal Reserve is patient and takes time to get to 2%, the market will digest it, especially if corporate profits in America are maintained,’ he said.
Investment Quorum’s medium risk portfolio has 32% in UK equities, where Lowman holds CF Lindsell Train UK Equity, Old Mutual UK Equity Income, Miton UK Value Opportunities and Neptune UK Opportunities funds.
A key theme he is playing domestically is the drop in the oil price. ‘The oil price has collapsed and this is a good driver for consumer discretionary companies. We have exposure to mid and small caps, which gives us further exposure to services such as restaurant companies and companies that are sensitive to the consumer,’
‘The money the consumer is saving in petrol costs is being spent elsewhere. A lot of those businesses are benefiting.’
Elsewhere, Lowman has an 8% allocation to Asia, where he is seeking out markets with potential for high growth, such as Vietnam, Taiwan and Indonesia.
He gains exposure through the Baring Asean Frontiers fund, which invests across Southeast Asia. Although Lowman said valuations are not cheap, the long-term investment case remains sound.
The portfolio also has 5% in property and absolute return funds and he is holding onto 2% cash. Lowman only has 15% in fixed income and 6% in inflation-linked bonds and no real exposure to sovereign debt or long-dated bonds.
‘In the last few weeks we have seen quite a lot of money exit from bond markets in expectation that interest rates in America will be going up soon,’ he said. ‘Already we are getting a filtering out of fixed income and I think, looking at the numbers, quite a lot of this is going into cash, pending reinvestment. But I think that money will back into equities.’
Over three years, the group’s balanced portfolio is up 34.73% against a 10.98% rise in its benchmark of cash plus inflation. Over one year, the fund is up 8.85%.
Lowman said the decision to up equity exposure had driven performance. His bond exposure performed less well, however.
‘The areas that have added the most value obviously have been in the equity market. Our key drivers have been having an overweight in North America over that period.
‘We have been overweight in Japan for three years. We didn’t get hit hard on the Japanese yen, which has been weakening over that time, because we hedged out our exposure,’ he said.
‘In hindsight, having less in bonds could have helped. We already have an underweight and just hold short-dated paper and index-linked bonds and they flat-lined.
‘We did not make or lose any money. It has been sort of dead money.’