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Asset allocation: OakTree Wealth Management

OakTree Wealth Management has started to position its four portfolios with capital preservation firmly in mind, arguing there is more scope for markets to be derailed this year.

Chief investment officer Ian Brady will be investing “much more gradually” over the coming year in the Income & Growth, Growth, Income and Ethical strategies in the expectation that markets will continue to be rattled by a range of concerns.

“We would rather give up a bit of performance on the upside to protect the clients on the downside,” he explains. 

“The world is probably not going to go as fast as everyone expects this year but I think we will be able to avoid a disaster. However, the news might get very bad from time to time.”

Among these worries are uncertainty over how China will address its credit bubble, markets pricing in early rate rises in the UK, suspicion that the world’s central banks are on the brink of bringing ultra-loose monetary policy to an end and the impact of Japan’s consumption tax.

Of these, China’s credit problem is most on Brady’s mind. 

He says markets will not really move forward until Chinese authorities convince them it has a plan to deal with provincial governments’ soaring debts.

“Either of two things is going to happen: the developed world is going to pull Asia up and all economies are going to do okay, with asset prices continuing to rise; or Asia is going to pull the developed markets down and we are going to have a tricky time.”

Out of these two possibilities, Brady expects to see a “bumble-through scenario” where China is able to work out how to deal with concerns over its local government debt, thereby easing market concerns over its economic health. 

He predicts this may carry “some pain but without a Lehman moment”.

Taking US profit

In light of this outlook, recent moves by OakTree include taking profit in the US, which it accesses through Terry Ewing’s £120.7m Ignis American Growth and the SPDR S&P US Dividend Aristocrats Ucits ETF; and Europe, where exposure is through Stephanie Butcher’s £255m Invesco Perpetual European Equity Income fund.

This move was made after both regions posted strong gains in 2013. US stockmarkets consistently touched record highs last year as sentiment turned increasingly bullish. Europe also saw strong gains after European Central Bank president Mario Draghi’s now famous ‘whatever it takes’ speech in 2012 continued to instill confidence in the previously unloved region.

Brady says: “Everyone talks about this great bull market but it has only been in the US and continental Europe. The FTSE is down since tapering was first brought up last May, as is Japan, Asia, Latin America and emerging markets.”

The firm now has almost 9 per cent in US equities, down from 12 per cent last summer. 

It is underweight European equities, with the allocation being trimmed from 5 per cent to 3 per cent over the same period. 

Proceeds were used to take a 5 per cent position in the US dollar across all the portfolios. 

Brady says: “We do not think the dollar will continue to fall against sterling. Indeed, we think it should increase against sterling.”

Returning to commercial property, another move over the past nine months has been to return to UK commercial property. OakTree sold out of the asset class towards the end of 2011 but then bought Fiona Rowley’s £2.5bn M&G Property Portfolio in early 2013.

Brady says: “We are trying to concentrate on the not-below-prime, just outside central London because we think you can still get very good yields there. These areas had not really responded to the recovery in the UK economy until the last few months and that could lead to decent capital appreciation plus good income growth.”

OakTree’s interest in asset classes that have been left behind in last year’s gains has seen it pay more attention to Asia and global emerging markets, both of which suffered amid concerns over Chinese growth and the impact of the Federal Reserve’s QE tapering.

Asian exposure, which was halved from 18 per cent at the start of 2013, has been lifted to 10 per cent through Thomas See and Richard Sennitt’s £218.2m Schroder Asian Income Maximiser fund. 

OakTree has also begun to “nibble away” at Julian Mayo and Mark Bickford-Smith’s £111.7m Charlemagne Magna Emerging Markets Dividend fund by starting a 4 per cent holding.

Bumpy road ahead

Overall, OakTree remains pro equities – it is very underweight fixed income – but is avoiding expensive defensives and trying to stick with a quality bias. Despite caution over how this year will turn out, Brady is optimistic about the long-term outlook. “Although we think markets will still make progress over the next three to five years, the road will be bumpy because all the valuation support has gone.”

The CIO predicts investors will make more money between 2010 and 2020 than they did between 2000 and 2010 – although they are more likely to feel “miserable” while doing so, he says.

“People were never really worried in the last decade but they ended up not making much money. Now we have had all these problems, people are paranoid. As we solve these issues the market will go up but because we fear a danger behind every corner, people will not feel as comfortable.”

About OakTree Wealth Management

OakTree Wealth Management was founded by Ian Brady and Jeremy Arthur in the midst of the financial crisis in July 2008. The Henley-based firm offers advisory and discretionary portfolio management. Brady says it has a traditional, research-driven investment process and seeks to “wear out the shoe leather” by meeting with around 150 fund managers and companies each year. 


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