While investors flock to property and emerging markets show signs of rallying, Skerritts head of investment Andrew Merricks is going against the grain by focusing on biotech. He is also keeping one eye on new opportunities in clean energy.
The Skerritts Tactical Growth portfolio, which places emphasis on the liquidity of assets, has no exposure to property. Merricks says the team at Skerritts “cannot find a case for
investing in property within a growth portfolio” due to the poor risk reward on offer from the asset.
He says: “We are still not convinced about property. We don’t see great returns from it, certainly from a growth perspective. Property has gone back to being what it always was, which is very dull.
“If anything is going to be susceptible to rising interest rates, property is up there. Liquidity is key for this type of portfolio too and if the market moves against property you are not going to get your money out of these funds quickly.”
Despite bouts of volatility through much of the year to date, emerging markets have begun to bounce back since the start of July. Many investors continue to see attractive long-term prospects in the region thanks to the growth of the middle class.
But the Tactical Growth portfolio has made what Merricks calls a “very deliberate” decision to have only minimal exposure to emerging markets with 0.85 per cent in Asia Pacific equities and 0.46 per cent in emerging market equities.
He says: “Around 2010, we were stuffed full of emerging markets and Asia. But we think the more recent rally we’ve seen this year is a false one and we are very happy to stay out of the region.”
The middle classes in many emerging market economies have become disgruntled, says Merricks, which could lead to an increase in geopolitical tensions.
“While the story about the growing middle classes in emerging markets is true, there are signs this newly found middle class is becoming dissatisfied and starting to question where the money has gone during the resources boom,” he says.
“We are seeing this already in places such as Thailand, Malaysia, Brazil and other parts of Latin America. So things are bubbling up and what you don’t want with this geopolitical risk is to have your money locked in emerging markets. It makes the rally very tentative.”
But perhaps the biggest call in the portfolio is the total lack of exposure to fixed income.
According to Merricks, this has not always been the case; in 2009 the portfolio had 20 to 25 per cent in high-yield bonds as a low-risk way of tapping into growth.
Looking at the sector now, Merricks says high-yield bonds have gone “way beyond good value” with equities proving “a far better place to fish for growth”.
So where is Skerritts finding opportunities? There is a bias towards smaller companies in both European and UK equities, says Merricks, which account for the two largest
regional exposures in the portfolio.
Biotech also runs as a theme throughout the portfolio, with Frostrow Capital’s Worldwide Healthcare investment trust taking the top spot as the biggest holding. The portfolio also features the £362.2m Axa Framlington Biotech fund and the Stoxx Europe 600 Health Care Ucits exchange traded fund.
The position in biotech was reduced slightly last quarter after the sector experienced a sharp sell-off but Merricks continues to have confidence in the asset class.
“There are major advances in the research area. It is 12 years on from when there was a boom in biotech and it takes about 12 years to test drugs and bring them to market. Pharmaceutical companies used to do research themselves but now they let the biotech companies get on with this too,” he says.
“Valuations did look stretched earlier this year but this theme hasn’t changed just because of a month or two of wobbles. We see biotech as one of the main stories of this decade.”
Clean energy may be deemed to belong in a socially responsible investment fund, says Merricks, but the investment team at Skerritts believe the subsector easily crosses into
The portfolio has exposure to clean energy through only one product, the £460.9m Pictet Clean Energy fund, but Merricks says he may build exposure as progress continues in the sector.
He says: “We are interested in energy as a general theme but within this the clean energy sector seems to be coming back on the agenda again. It was very strong in 2007 and 2008 and then suddenly, with the financial crisis, governments had more important things to spend money on and a lot of companies in that area went under.
“But now, particular things such as solar energy seem to be everywhere in Europe where there is an immediate focus on how to get alternative energy. We only have 5 per cent in there at the moment but we are keeping tabs on it as a theme.”