It seems an awful long time ago, but when I would go to football training as a kid, I would fret about what kit to wear, not wanting to stand out. My dad would say to me ‘don’t worry about what everyone else is wearing, you’re there to do a job, it’s not a fashion show’. It’s fair to say my dad was more Graeme Souness than Paul Pogba when it came to such matters.
Doing things a little differently takes a certain nerve; a certain confidence. Within fund management, it is no different. However, the confidence does not have to be in oneself, but rather in one’s investment process.
If in complete isolation one considers where we are in regard to market valuations, easing back into risk assets feels like the right thing to do, particularly considering bond yields have retraced somewhat since the start of December. Earnings have been robust and profit margins are close to historic highs, yet global indices have fallen.
Our investment process is highlighting that valuation multiples are remarkably more attractive today than in Q3 2018.
I recently read a number of articles and blogs where fund buyers were offering up their ‘top picks’ for 2019, and I would say that the lion’s share of such ‘top picks’ were in the form of an alternative or defensive strategy. This comes off the back of a reasonably grown up correction in most markets, which I found a little surprising. Whatever is the opposite of the adage ‘the time to buy a straw hat is in the winter’ comes to mind.
Those who know what we represent would know that we do not find being bullish overly comfortable, therefore our observations are made with a large pinch of caution. There are many moving parts to this debate, and perhaps none more so than where we are in the monetary cycle.
Cheap and freely available debt has fuelled growth and geared up earnings, somewhat making forecasts as we move into a new economic regime difficult. We expect to witness change at all levels: monetary policy, fiscal policy and politically. This will change landscapes and without doubt, offer up pockets of material volatility.
We must be cognisant of that, but we must also be confident to say that we are seeing value in markets, and we are not afraid to say that we have been selling down our cash and putting it to work.
If we do not buy the FTSE 100 at 10x forward earnings, when do we buy it? If we do not add to Japan on 1.1x price-to-book, when do we? If we do not look at the domestic reits on 42% discounts, when do we? The facts have changed in the past quarter, and therefore our stance has changed.
If we are true to ourselves that we invest for the medium to long term, then we are absolutely right to deploy capital at this junction. If we fret about standing out from our peer group at the end of the first quarter, then nothing of note will ever be achieved and existence is futile.
We are here to do a job, not to worry about what others are doing.
How MitonOptimal is putting its cash to work
Closed out S&P short
We care little about whether we are contrarian or consensual. What matters is the price we pay for assets. What is obvious to us is where the tremendous value in markets is versus what is perhaps fair value or worse. What is not so obvious is when that value will be recognised and rewarded.
We have identified domestic UK, Japan and certain parts of the emerging markets as materially cheaper than the US market, albeit we recognise that the US market valuation multiples are somewhat more palatable than they were in Q3 2018. This led us to closing out our net short S&P exposure. However, we are yet to get excited enough about the US to entice us to be long.
Traded back into Miton Group
Many asset management companies are trading 50% lower than where they started 2018. We are watching a small number of stocks in this space, but within our Opportunities fund we re-entered Miton Group as a higher octane play on the global market, having previously sold out in early October 2018 at a multi-year high. We believe that this trade allows us to capture more than the market beta in what appears to be an oversold short-term environment, thus allowing us to employ less capital in exchange for greater upside participation.
This we believe is an efficient way to manage our risk budget. In the late summer of 2018 there was a real global divergence of value, but the spate of volatility in Q4 acted somewhat as a valuation reset, offering better value across many indices rather than just a select few. There is no shame in capturing beta.
James Sullivan is UK managing director at MitonOptimal and is responsible for the firm's multi-asset funds.