City Asset Management’s James Calder is not letting the turn of the year alter his perspective on the prospect for equities, with the group’s head of research remaining bullish on their outlook.
While some managers may use the start of the year to have an epiphany, Calder says his market view has not altered for the last couple of months.
Within the discretionary manager’s CPI-plus 4 per cent mandate – its version of a balanced portfolio whose objective is to produce the stated real return in excess of inflation – UK and overseas equities account for over 60 per cent of the portfolio.
Calder says: “Within equities we remain always cautious and conservative, but with a small ‘c’. This means while we are positive on the long term outlook for equities, we anchor it with degrees of caution within the portfolio.”
For Calder this caution does not come through by holding hoards of the mandate within cash. Instead it comes from holding an “eclectic mix” of alternative mandates, such as infrastructure, global macro and ground rent funds, that provide an uncorrelated source of returns.
“Cash rates are very poor, putting you in a negative real return environment,” he says. “We would rather anchor our defensiveness on alternative sources of returns and, to an extent, through our fixed interest exposure by using absolute return strategies.”
Calder is far less optimistic on fixed interest than equities, noting duration issues and concerns of possible interest rate rises in both the UK and US this year. He says the 15 per cent weighting to the asset class within the portfolio is made up of a mix of credit long/short funds (quasi hedge funds), two strategic bond mandates and some floating rate note exposure.
“Floating rate notes provide protection if rates do start to rise, which we now think could happen at the end of the year,” he says.
So what of the portfolio’s equity exposure? Some 25 per cent is held in the UK, a level which Calder says has remained stable for the last year.
“Like most of the equity regions we are invested in, the majority of our exposure to the UK comes via long-only and long-biased funds to reflect our bullish view,” says Calder. “This compares with 2008 when not only was our weighting to the UK much lower, but the types of funds we were invested in were very different, being more long-short orientated and market neutral to reflect our bearishness of that type of asset.”
Within the UK, Calder says the mandate holds funds across both the capitalisation and style scale. For example, alongside Majedie UK Income sits the GLG Undervalued Assets fund, while Calder says holdings in the Old Mutual UK Dynamic and CF Miton UK Small Companies funds have also done well.
“All of the managers we hold have a view on producing a real return and those that we pick are complementary to each other, so we are not doubling up on the same thing.”
One equity region which has served the portfolio particularly well is the US and Calder says there is now an internal debate as to what to do with the weighting.
“The US has been outperforming the rest of the developed world by a country mile and it no longer looks cheap but, for me, nor does it look that expensive,” says Calder.
“As such I am happy with our current 11 per cent US weighting, but it is more than likely that the next move will be to reduce this or take profits. However, this will be rotated into other equity regions rather than stored in more defensive areas.”
The region this US money is most likely going to find itself moving into is Japan. Having adopted a structurally bearish stance on the country for the last decade, Calder has begun to adopt a more bullish outlook in the belief that real structural change has started to take place.
Having adopted a zero weighting in Japan for a number of years, in the fourth quarter of last year this was increased to 3 per cent and could rise to as high as 6 per cent in 2015.
One asset class that is remaining at a zero weighting within the portfolio is commodities. Previously Calder used gold exchange traded funds and equity long/short funds to gain exposure to commodities but he has not done so for the last 18 months.
“For our clients it is too volatile an asset class to be invested in and while we will continue to look at it, it would take an exceptional view for us to get back in.”
An asset class that did gain in prominence throughout the course of last year was property. Starting 2014 with a weighting of just 3 per cent, the exposure was increased all the way up to 12 per cent by the year’s end. Calder says the exposure will remain stable at this level this year as he is positive on the asset’s outlook.
All of the weighting is held within bricks and mortar funds, namely Kames UK Property Income, the Threadneedle UK Property Trust and a recent addition in November in the form of Guy Glover’s F&C UK Property fund.