Asset allocation: 7IM’s Ben Kumar shifts focus to European banks

7IM manager reduces exposure to UK and US to tap into ‘undervalued’ banking sector

Seven Investment Management investment manager Ben Kumar is shunning the UK and US markets in favour of “undervalued” European banks and to try and capitalise on the growth stories of China and India.

Kumar, who has been overweight Europe and Japan for around two years, recently reduced his portfolio exposure on UK equities from 16 per cent to 9.6 per cent. US equity exposure has also fallen from 10 per cent to 4 per cent.

In Europe, 7IM has been investing a big chunk of its equity allocations in the Euro Stoxx Banks index to track the banking sector.

Kumar says: “European banks had a very tough time in the last four years so that was an opportunity to buy an asset we thought was really undervalued. With quantitative easing restoring confidence in the eurozone, funding costs are cheaper for banks and that makes their margins hold up. European banks have much further to go before they look anywhere near fairly valued, so we really like that.”

Kumar’s Balanced fund, part of 7IM’s multi-manager range, includes the £700m Active Multi-Managed fund and the £1.6bn asset allocated passives range.

For six to eight months, 7IM has also been shifting its emerging market exposure towards Asia as it looks to tap into growth in China.

Kumar says: “China might not be growing as fast as everyone thought 10 years ago but it is much bigger now than it was then. If China grows at 7 per cent this year it adds the equivalent of an entire Indonesia to the world economy.”

7IMtable

Kumar is also looking to take advantage of the “compelling” growth story in India following the election of reforming prime minister Narendra Modi. He has a specific position in the Indian index despite the “great rally” last year on the back of Modi’s election. He says the Ind-ian central bank is being effective in controlling inflation and starting to promote growth and it has room to boost inflation.

“There’s actually room for even more upside because of these structural changes. There are a lot of people who maybe want to invest in India but haven’t found a way yet or just don’t have it on their radar.”

7IM is underweight fixed income relative to its benchmark.

Kumar is slightly overweight cash and that is reflected throughout 7IM’s fixed income portfolio.

“Where we have bond exposure we want to make sure it’s not exposed to a rise in interest rates in the same way a 10-year government bond is. That’s what we’ve been worried about for a good couple of years now and it has been painful. For a cautious investor we prefer to be short duration in a quality asset so we have added and increased our exposure in European high yield bonds.”

While Kumar argues the UK political situation is “pretty stable” compared with many other places in the world, he warns the uncertainty created by the upcoming general election risks spooking the markets.

“Global investors who do not look at the UK all the time maybe think the FTSE 100 represents the UK economy, so it is the first thing they sell when they panic.”

Despite this, Kumar says many UK asset managers are retaining a high weighting in UK stocks. “Remaining stuck to that kind of thinking when you’ve got such a big event like the election coming up is potentially something that could hurt them.”

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