The International Monetary Fund may have cut back its estimates for global growth in 2015 but Henderson Global Investors deputy head of equities Bill McQuaker believes the world economy could surprise on the upside.
While the crisis lender now expects expansion of 3.5 per cent in 2015, down from its previous forecast of 3.8 per cent, the fund manager’s co-head of multi-asset and lead manager on the team’s flagship Multi-Manager Income & Growth portfolio asserts: “One of the big surprises in 2015 could be that global growth turns out faster than people expect.”
McQuaker’s argues the most significant shock could come from Europe, where expectations for the region have become “very depressed”.
As a result, McQuaker and his team have been upping the £538m fund’s exposure to European ex-UK equities since late October, during which time the fund’s allocation to the continent has swelled by circa 4 percentage points to around 12 per cent. He suspects too that this topping-up has got further to go.
McQuaker says: “The most noticeable change in the portfolio has been adding to European equities, and the money has come out of the UK and North America. The US has been a very good market for us. But if the rest of the world catches up, it might be a bit more pedestrian.”
The picture for the UK, where the fund has around 15 per cent invested, is more complicated, says McQuaker.
“After the UK elections, on the back of the fiscal deficit there will be a renewed emphasis on austerity,” he warns.
He notes too that, in terms of UK valuations versus the US, the UK looks cheaper.
“The UK has significantly under-performed the US but Europe has been even worse, so we would rather be there than in the UK,” he adds.
“Essentially we are transitioning away from markets that have done well, into those that have not performed as robustly.”
In terms of what will help drive up growth across Europe, McQuaker highlights the benefits a cheaper euro and the collapse in the price of oil, as two key drivers.
“In addition the ECB has been encouraging growth in 2014,” he says. “all of this potentially points to Europe surprising. There is the prospect of a much better fiscal backdrop – and there is no better way of improving growth.”
The Income & Growth fund also has a larger proportion of its assets invested in emerging market equities, shifting an extra 2.5 per cent into the region and bringing the fund’s total to a still modest 4.3 per cent allocation.
McQuaker says: “Global emerging markets have performed poorly since 2011 and are widely disliked but valuations are reasonable and if global growth does surprise, the region should participate in that. In addition, for some emerging markets lower commodity prices have a very positive impact.”
The fund notably has a smaller proportion in Japan, at just over 3 per cent. Looking to the world’s third largest economy, he says: “There has been a lot of good news already but we like the look of the macro story. The government there is trying to get corporations and the public to take more risk – to get them away from bonds and into the stockmarket.”
McQuaker marks a decade managing the fund this year – and over the past 10 years to 20 January it has delivered a total return of 89 per cent, comfortably outperforming the IA’s Mixed Investment 20% – 60% sector average of 57 per cent, according to FE Analytics.
Recently the vehicle’s performance has been more in line with its competitors, where over three years it just edges ahead of the sector’s 22 per cent average with a 23 per cent return.
Similarly, the past 12 months has seen the fund achieve a 4 per cent return, just under the sector’s 5 per cent mean. McQuaker, like many of his peers, has dramatically pared back his fixed income holdings.
Today, the combination of high yield, government and diversified bonds makes up just under 15 per cent of the fund. The stance naturally meant that the Henderson portfolio, alongside a plethora of other multi-asset funds, missed out on 2014’s very surprising fixed income gains.
“We still do not have much exposure, but the bond market had a very good year in 2014 and we did not participate – it looked fully valued then and now even more so.”
But he admits the team is willing to dip further into the sector when investment opportunities arise.
He says: “There could be some opportunity in US high yield as the market there has sold off a bit and there have been opportunities in emerging market debt too which we have taken advantage of to a degree.”
Property has largely acted as a bond proxy for the fund and currently represents around 10 per cent of its assets, but given the stellar double-digit returns the sector has enjoyed in recent years McQuaker now expects that rally to cool.
He says: “We bought commercial property for the first time only two years ago. With property we wanted to be early in and we want to be early out. We will not be adding any more to the allocation and the next decision will mark a reduction as we are beginning to anticipate returns that might be more moderate going forward.”
McQuaker, alongside Paul O’Connor, heads up Henderson’s Multi-Asset team and together are responsible for £6.5bn in assets under management. McQuaker joined Henderson in 2005 as head of the multi-manager team with responsibility for the Henderson Multi-Manager Income & Growth, Managed, Active and Distribution funds. He also took the lead on asset allocation across the suite of portfolios. In July 2007, he helped launch Henderson’s Diversified Growth proposition and in January 2011 assumed the role of deputy head of equities.