The CF Miton special situations and strategic portfolios have been defensively positioned for some time now. We take a view on the wider macroeconomic environment and build our asset allocation from this basis. We have been bearish for a long time on the wider global environment and negative on risk assets such as equities, commodities and property.
We have delivered consistent returns over the last three years with low volatility, as well as delivering positive returns in 2008, and we have been able to diversify the risk quite substantially in these portfolios.
Markets have been focused on Europe and what is going to happen with the periphery as Italy and Spain join the fray. The US has been struggling with its budget deficit while Ben Bernanke has been weighing up a further round of quantitative easing, which has been put on hold for the time being at least.
On top of all this, weak data continues to come from all directions, from GDP figures to unemployment numbers. There seems to be a gradual realisation that the world is not growing as fast as people were hoping or expecting and perhaps a realisation that QE2 does not seem to have worked. It has not created any jobs and really has not done very much at all.
So what happens next? If we are going to be in a slow growth environment around the world, what does that mean for assets, particularly equities, which seem to have been priced more for hope on the upside than this?
MAM is in a fortunate position in that it holds a lot of cash in the portfolios and can now buy into some good opportunities, including large-cap UK sustainable yield equities, and avoid sectors such as financials, commodities and resources. We also had a big weighting to Asia for the last six to 12 months, between 15 per cent and 20 per cent of both portfolios, but those weightings have been in low-risk assets, mainly sovereign bonds or AAA investment grade debt and also in local currencies. We are looking to shift some of that into risk assets, principally equities at this stage, but we will look to Asian property as well if markets come back sufficiently.
Gilts and sovereign debt have delivered strong returns for the funds this year and some profits have been taken recently.
We do need leadership in Europe. The European Financial Stability Facility needs to be increased substantially. It is all very well the European Central Bank going into the marketplace and buying up Italian and Spanish debt but it cannot do that forever and the day it stops is the day we will see those yields climbing again. Unless there is a decently sized fund that the market is not going to take on, we have still got problems. All we are doing is just shoring up for the moment.
The next US presidential election is in just over a year’s time, so will that prevent anything substantial happening in the meantime? Something more positive needs to be done about the deficit but I doubt whether anything will happen.
One thing is certain, MAM’s focus will remain on preserving investors’ capital.
Martin Gray is manager of the CF Miton special situations and strategic portfolios at MAM Funds