Aviva’s Samouilhan cuts US exposure and boosts European holdings

Aviva Investors multi-asset manager Nick Samouilhan has significantly reduced his US equity exposure, as he sees a stronger dollar hitting large caps’ earnings, and is more positive on European companies, both in the equities and fixed income space.

“We expect a strong dollar this year, and that would naturally mean that US large companies will struggle, given the exchange rate, so we are underweight US equities,” says the fund manager, who has been working on Aviva’s £328.4m multi-asset fund III since launch in 2012.

US equity totalled 36 per cent of the global equity allocation of the fund in September but he has reduced that to 26 per cent and the general outlook “is to reduce that further in time”.

“The US large cap has got a double hit: they’ve started this year by being quite overvalued versus earning expectations and at the same time you’ve got a strong dollar as the main view, which will hit US large caps’ earnings.”

Samouilhan, who also co-manages the other four funds within the Aviva Investors multi-asset range alongside Peter Fitzgerald, favours European equities instead, overweighting the asset class and increasing the allocation from 12 per cent seven months ago to 17 per cent as of the end of April.

Knowing how the ECB would have “acted” and having released its big QE programme, Samouilhan also decided to hedge the euro exposure by 50 per cent to reduce the loss he was expecting as the Euro weakened.

“The other theme is that the nature of what the ECB is doing should naturally lead to a compression of yields in the periphery, such as in Italy and Spain,” he says.

As a result Samouilhan is planning to increase the fund’s fixed income exposure and, in particular, he looks to buy more into 10-year Italian bonds.

He believes many people have a negative outlook on Europe, but “you have to see how the economics had played out versus expectation,” he says. “Europe could easily be lagging, but if it is not as bad as people think then you’ll see companies surprising on the upside.”

Instead, he is hearing that “some of the European companies, particularly the ones geared towards exporting, are saying that in the second half of this year they aim to beat expectations. Everything that is priced in is bad, but it’s not as bad as people think.”

The Aviva Investors multi-asset range had total assets of £791m at the end of April, up from £496m on year ago, across the five funds, with each product having a different risk profile.

“They are designed to tie up with a particular client-risk profile. The five funds are tied to the person’s attitude to risk and from that the idea is to generate the highest long-term return combined with the level of risk so the higher the risk of the fund, the higher long term return you would expect.”

Samouilhan says the fund takes a different approach than others as the team doesn’t revisit it every three to six months.

“We only revisit the fund when we think the market is changing, meaning that in theory we do it quite frequently, but in practice we do it whenever there is a substantial change in our outlook, so we don’t wait until the end of the calendar month to make changes,” he says.

Following this strategy, Samouilhan’s next concern is about how the markets will react to the next US interest rate rise, rather than when the next timing of a hike will occur.

He says: “It is hard for us to see how rates will continue according to a normal historical interest rates past.

“It is not about them raising interest rates now, it is about the market expectation that will move the curve too quickly.”

Samouilhan’s fund is currently also underweight emerging markets, which he believes are at a higher risk premium, and he also has a zero allocation to commodities.

He says: “If you’ve got rising interest rates, that will put funding pressure on emerging markets and it is going to become increasingly the case that you’ll get divergence and separation between different emerging markets out there.”

The fund doesn’t have a large asset allocation in UK equities at 4.6 per cent, compared to many of the fund’s peers, so Samouilhan is not really worried about any ‘Brexit’ scenarios.

However he says: “The EU referendum will obviously bring uncertainty. If there is a case of a clear and present danger we’d look to mitigate that risk as much as possible.

“It is hard to take a view on politics from here. It is not clear on what a Brexit could mean in terms of economic relationship, and that’d be subject of intense negotiations.”