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Asset Allocation: Brown Shipley growth trades US for Japan

US stocks have had a dream run for the past few years so the Brown Shipley Multi-Asset Growth fund has trimmed its overweight to search for bargains elsewhere

Brown Shipley’s Multi-Asset Growth fund has trimmed its overweight position in US stocks to search for bargains elsewhere.

Fund manager Simon Nicholas says the US has been a large allocation for the fund for a long period, accounting for more than half of the portfolio’s overseas equity exposure.

However, he has recently cut that back by several percentage points – the relative outperformance from other parts of the portfolio – and added to Japan instead.

“We’ve had a fairly full allocation [to the US] and that’s obviously been very beneficial,” Nicholas says.

While many continue to write off the US as a poor ground for active management, he believes there are pockets that are being exploited by capable managers.

The £377m Henderson US Growth and the £943m Fidelity American, which has a value strategy, are both doing well which points to good stockpicking, he adds. 

Japan, however, offers much more scope for active managers to make money, he explains.

“The investment infrastructure of Japan, the analysts and brokers, has fallen over time because of the poor market returns of the past 20 years.”

With the central bank and government committed to pumping up the markets with money and eliminating deflation, the opportunities are too great to ignore, he adds.

The fund has hedged the yen as a necessity because of the monetary avalanche underway in the nation; the team does not usually try to take currency calls.

Besides, the yen – a traditional safety asset – was bid up massively in the aftermath of the global financial crisis and the US’s multiple bouts of quantitative easing.

Nicholas says the currency is only returning to its pre-crisis levels now and argues the plummeting value cannot be be called a “competitive devaluation”.

The euro is not hedged by the fund, despite the currency bloc potentially needing a monetary boost to avoid deflation.

Nicholas says the euro has already weakened significantly against both sterling and the dollar. And the amount of debt the European Central Bank could mobilise is much less than Japan and the US.

There is also a lack of cohesion among European bigwigs, as German policymakers are stridently against inflationary measures.

European markets have been “horrible” this year, but that has started to make them worth a look, he says.

“Expectations are pretty low, markets have underperformed, equities are cheap and that’s starting to look like an opportunity going forwards.”

Added to that, the fall in energy costs will offer significant savings to European companies and put more money in consumers’ pockets. 

At $110 a barrel Europe spends about $200bn annually on fuel, so with prices now below $70, that could shave tens of billions off their payments to oil exporters.

“So I would expect our European allocation to increase,” Nicholas says.

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The portfolio holds the £630.2m Neptune European Opportunities fund which has been “a hero to zero story”.

From a 22.2 per cent return in 2013, it has crashed to losing 4.9 per cent in the year to 4 December 2014.

The fund is domestically orientated with an overweight in financials and consumer stocks, perfectly positioned for a recovery on the continent, Nicholas says.

It rode the wave of optimism last year, but subsequently took a hit when that mood was broken by disappointing earnings growth and macro numbers.

The fund reacted the way it was supposed to, so he was not upset and he still expects Europe to recover.

The Brown Shipley fund has recently changed from completely multi-manager to a multi-asset approach in an effort to drag the total expense ratio below 2 per cent. It also cut its annual management charge 25 basis points to 1.25 per cent.

“In this environment of low growth expectations the charges come into clearer focus,” he explains.

“Estimates are that it is the right side of 2 per cent now, but it’s too early to say. It’s roughly 1.75 to 1.85 per cent where before it was about 2.2 to 2.3 per cent.”

The fund has a strong home bias, with 39.4 per cent in UK equities.

Taking advantage of Brown Shipley’s equity research team, the fund invests in most of its UK equities directly.

Large cap stocks are run in house, but the small and mid-cap stocks are accessed through funds. 

Nicholas hopes to move the mid-cap UK equities in-house direct as well, but doing so now without enough analysts would introduce too much stock specific risk to the portfolio.

The fund is the second riskiest in its recently revamped five-strong range.

It holds £30.4m, with virtually all of this invested for Brown Shipley’s wealth management clients. The fund has a large chunk of cash – 16 per cent – but that is due to internal money being transferred over in lumps and is quickly invested.

The firm expects around £250m will be held across the five-strong range at the end of next year. It currently holds between £120m and £130m across all funds.

Running them solely as a reliable product range for internal clients, it is possible that over time the funds may be extended to the general public.

However, the funds are running money differently to the traditional benchmarks, Nicholas adds.

“I’m a bit like a football manager trying to pick the best players to create the right team for the conditions. You start off with an overview of how you feel about the world and how that will play out. And then you try to pick the right players.”

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