Many commentators and experts continue to be relatively bearish on equity markets. It is not difficult to see their case. A possible bubble in the Chinese A-share market could easily burst and highly leveraged positions in private equity and hedge funds could suddenly go into reverse. Either of these could have a dramatic effect on global markets.
On top of that, Anthony Bolton has recently been quoted as being distinctly bearish. I might add that I sat next to him at the dinner where he made those comments and I did not think his views were nearly as bearish as they seem to have been interpreted.
I will put my neck a little on the line and suggest that all this bearishness is actually quite good for equities. It is when everyone is a raging bull and there is a feeding frenzy among private investors that I get really concerned. In my view, equities remain the most attractive asset class and I think any pull back is likely to be a buying opportunity.
For those of you who feel bearish, there are plenty of cautious managed funds available, for example, the Gartmore cautious managed fund. It has been run by Chris Burvill since its launch in February 2003 and I believe his contrarian style should help to add value against the mainstream funds.
The fund is currently weighted heavily towards large caps, with some 80 per cent of the equity exposure in the FTSE 100 and around 15 per cent in the FTSE 250. Small-cap and Aim stocks account for only 5 per cent. Bigger company exposure has crept up at the expense of mid-caps, which is hardly surprising given the strong run mid-caps have enjoyed.
The fund can hold a maximum of 60 per cent in equities. If Burvill is cautious, asset allocation will typically be 60 per cent in bonds and 40 per cent in equities, with those weightings reversed if he is optimistic. At the present, he is positioned almost 50 per cent in equities, with 10.5 per cent in cash and a fraction under 40 per cent in bonds.
Where does a cautious investor turn these days? Well, like me, Burvill believes that corporate bonds and property both look expensive. Unlike some commentators, I see little point in a so-called diversified portfolio which contains lots of expensive assets. Burvill points out that there are always opportunities in the equity market, so when you look at the high point of the market in 2000, the clever switch was out of Vodafone and into BAT whereas now you might argue the reverse is true.
Mega caps are at a 20-year relative low, out of fashion, unloved and generally unwanted. However, the positives have been largely ignored. They have great brands and high return on equity, excellent liquidity and good security, to name but a few.
The fund looks like an ideal core holding for those wanting a genuine contrarian approach and a very experienced manager at the helm. If large caps eventually get a rerating, this fund will certainly be near the top of the tables.
Mark Dampier is head of research at Hargreaves Lansdown.