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Asset allocation: Thesis takes profits from US but sticks with stocks

Thesis Asset Management took profits from US stocks and technology and biotech funds in advance of the recent market correction. 

Thesis research manager Ryan Paterson says the firm’s Mandate 5 model portfolio sold down its 1.73 per cent allocations to pharmaceutical-biotechnology and technology funds in August.

After a “phenomenal” few years, the high-beta sectors looked vulnerable to a correction, he says. “We were very happy with the funds but it was just a chance to lock in some profit and add to our cash allocations.”

Paterson Ryan Thesis AM 2014

The portfolio had reduced its overweight US holdings in the first and second quarters. While still bullish, the valuations were at a level where it paid to lock in some of the cash, says Paterson (pictured). “It’s been a good earnings season, beating expectations and compounded by a stronger dollar.” 

US stocks are “pricey” but, overall, Paterson says he is happy to stick with them. “It’s something you should be willing to pay because of those earnings improvements.”

The firm plans to put the cash to work in equities at lower valuations.

A double-down on Japan could be on the cards, says Paterson.

The portfolio holds the GLG Japan Core Alpha and JOHCM Japan Sterling funds, both hedged. “We’re still overweight and I believe it will be the hot topic for our next asset allocation meeting,” he says.

The Bank of Japan’s shock decision to flood even greater amounts of quantitative easing into its market – coinciding with the country’s gigantic pension fund’s long-rumoured uptick in equity exposure – has “changed the game”.

Moving from about 12 per cent in domestic companies to 25 per cent, the BoJ’s shift is likely to be mirrored by private investors who have considerable savings. “That’s a lot of money flowing into Japanese equities,” Paterson says.

Thesis had mulled increasing exposure to Japan in the past few months but held off because of the uncertainty surrounding the second hike in sales tax scheduled for next year.

Prime Minister Shinzo Abe has previously said he was “neutral” on whether the increase should go ahead. The first 3 per cent hike to 8 per cent in April caused the sharpest slowdown in the economy since the credit crunch. Paterson says the hike will happen as the nation tries to shore up its nightmarish fiscal position.

The firm has fixed its yen exposure across the portfolios and has also hedged the euro back to sterling.

“We think both will weaken but we’re big believers that the dollar will be the winner and strengthen.”

The portfolio remains underweight Europe, a stance that has been held for a while, he says.

“We just don’t think corporate earnings are as well supported as the US. The US corporate earnings are 16 per cent higher than they were back in 2007. Europe’s still 29 per cent below pre-crisis levels.”

Earnings forecasts for Europe had been a bold 17 per cent at the beginning of the year but have been incrementally slashed to about 8 per cent now.

Paterson expects the European Central Bank will be forced to roll out QE of its own as the economic gloom continues to hammer the continent’s markets. 

It does not necessarily matter which central bank is doing the printing but someone needs to, he adds.

However, it is unclear whether European banks will be able or willing to let the money flow to the businesses and people on the street, Paterson explains. “We’re not so optimistic on it happening immediately.  The companies are not in bad shape out there but you’ve got to see that investment pick up.”

European savings rates are increasing as well, creating a further deflationary pressure, he adds. 

“You can feel it in the markets when the stimulus stops, the market falls.”

Thesis

Thesis Asset Management

Thesis AM runs £1.65bn in its portfolios, although the firm also has about £7.7bn in authorised corporate directorship business for other companies.

The firm has four investment subcommittees for UK equities, fixed interest, funds and investment trusts and ethical considerations, with the central allocation committee headed by director Michael Lally.

The subcommittees are charged with fund selection in their remits, with overall allocation controlled by the central committee.

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