BlackRock’s fund manager Justin Christofel is another believer in the European equities story but is cooler on UK and US stocks.
In his co-managed £76.8m Global Multi-Asset Income Fund he has shifted marginally out of US equity exposure into European equities, where valuations are “less demanding”.
“Equities are a bit more attractive in Europe than the US as the macro backdrop in the medium term is more supportive,” Christofel says.
In the US the macro momentum has “slowed a bit”, he adds. An interest rate hike this year in the US will not help the markets, creating more uncertainty and more volatility and making it more challenging for equities consequently.
Christofel and co-managers Michael Fredericks and Peter Wilke were favouring the US three months ago but the portfolio is now much more balanced between US and Europe.
“We are close to equal between US and European equities today and we’ve probably moved from a position of about three to four per cent higher in the US and lower in Europe. So the magnitude of the move has been about 4 per cent.”
However, Christofel is not enthusiastic about UK stocks either, having just 4 per cent allocated to the sector.
”Overall we want to generate attractive and consistent income, and consistent income at low to moderate risk so [the fund] is really designed to help clients generating an attractive income stream. Before the financial crisis, generating an attractive income stream was less difficult; clients could simply buy high-quality bond portfolios.”
However with the past three to five years seeing extraordinary global monetary policy, including QE in the UK, Eurozone, US and Japan, yields have been pushed dramatically lower across the fixed income universe.
He says: “Over the past couple years, the risk profile of the portfolio has been pretty modest, so on a risk-adjusted basis we are pretty happy with the income and total returns we have been able to generate.”
The strategy has been run for US investors since late 2011, only opening up to UK investors in January this year. The US version has delivered about 8 per cent annualised returns and between 5 and 5.5 per cent income over the past three years. In the future Christofel expects to maintain the 5.5 per cent income.
The fund has seen strong performance in the past years from some of its credit exposure, particularly high-yield early in the fund’s existence, in 2011, 2012 and 2013. At that time half of the portfolio was invested in high-yield holdings.
However, more recently he has dramatically reduced that allocation to 20 to 25 per cent given that valuations are much less attractive. ”Because of our risk first orientation, we are trying to generate consistent income but it is not at all cost.
”In December, when the return of volatility tempted some investors back into high-yield bonds, we decided it was best to wait. This paid off for us, and helped keep the fund’s…yield resilient.”
The team has now increased the holding in high-yield, though only selectively.
Covered calls has been another area that’s helped the portfolio, says Christofel. “A few years ago we didn’t have any allocation to covered calls,” he says, but it has since grown to 18-20 per cent in three years.
Christofel also says the 5.5 per cent income generated in the fund is much more diversified than his peers.
“A lot of fixed income strategies tend to be overly reliant on going down in credit quality to generate higher levels of income. Given current valuations and liquidity challenges, going down in credit quality to generate higher levels of yield and income for their clients is likely to be a very dangerous strategy.”