Given the inevitability of tighter monetary policy arriving some time in the not-too-distant future, for -Investment Quorum chief investment officer Peter Lowman stocks are definitely the place to be right now.
And it is a scenario he believes will endure for many years to come.
“The most toxic assets at the moment are bonds. Equities will outperform fixed income over the next decade,” he asserts.
The turmoil and uncertainty clouding this part of the market is proving a major headache for all asset allocators looking to produce sensibly diversified portfolios.
The firm presently runs eight model portfolios and Lowman, like his peers, needs to hold some exposure to bonds. But simultaneously, he is not over-burdening his portfolios with an asset class of which he is -currently sceptical.
Its balanced solution vehicle, for example, carries a hefty 67 per cent in equities despite sitting in the centre of the risk spectrum. “We do not try to be focused on being overweight or underweight – we are trying to add value. It is about what we are holding,” he explains.
In contrast, bonds make up some 21 per cent of the fund, down from around 35 per cent just a couple of years ago.
Lowman says: “With bonds, we are looking to get a return of cash plus inflation. We were in high yield some 18 months ago and we made a good deal of money out of it. But today investors are not being sufficiently paid to take on the risk.”
The position is being backed up by a 5 per cent weighting in absolute -return as well as a similar allocation to bricks and mortar. Given the yield commercial property is delivering, he admits he is using it very much as a bond proxy.
But within his equity allocation, a decent slug of 32 per cent is invested in UK equities.
Lowman says: “I quite like the UK. But people are way too focused on the FTSE 100. The index is too heavily weighted towards miners as well as oil and gas firms and banks.”
The FTSE 100 is up by a mere 1 per cent year to date, but as Lowman points out, if you drop down the market cap pecking order, to the FTSE 250 and FTSE Small Cap, total returns of 10 per cent and 8 per cent respectively have been enjoyed.
“Within these indices you are not governed by oil, but more by -services – and the likes of the restaurant companies have been doing well as a result of people having more cash in their pockets, on the back of the fall in the price of oil,” he adds.
Lowman drills down into the funds he holds to see what shares are being selected and is currently most keen on managers buying recovery and opportunity type stocks.
He cites the George Godber and Georgina Hamilton-run Miton UK Value Opportunities fund, as well as the Mark Martin-managed Neptune UK Opportunities portfolio, as being among those he is backing now.
Lowman has previously been happy to use passives for investing in the US but given the 179 per cent rise the S&P 500 has witnessed since the -nadir of the crisis in March 2009, he believes it is now time for stockpickers to take centre stage.
While his balanced fund has some 11 per cent invested in the world’s largest economy, a couple of years ago he had nearer to 17 per cent.
Lowman has used that cash to build up positions in Europe and Japan, both of which are in the midst of large-scale quantitative easing strategies. “They have been basket cases but both now have very supportive central bank policies. Once the Greek crisis is resolved, a lot of Euro-pean stocks will do well.”
While Lowman has no exposure to emerging market funds, Asia ex-Japan makes up a decent 8 per cent of the balanced fund’s assets. Within this, 4 per cent is spread across the Association of South-east Asian -Nations region, the political and economic organisation of 10 countries, including Indonesia, Malay-sia, the Philippines, Singapore and Thailand.
On a 10-year time horizon basis Asia and nations represent one of his favourite plays. Lowman says: “These nations are growing much faster than China. They have a lot of potential, given they have such large and rising consumer bases.”