Brown: Absolutely, but they should be regulated intelligently, so that the benefit of regulation should not cause the product to become valueless to the client. We would advocate a move to increased transparency, enabling the client to really understand what they are buying and which companies are the counterparties to the product. We would even consider the application of a risk of default rating.
Lowcock: Yes, structured products are not simple investments and frequently they are being created and marketed to professionals and investors who do not necessarily have the expertise to understand such an investment. It is the FSA’s responsibility to provide protection and clarity on investments.
Urquhart Stewart: Recent events have illustrated perfectly the need for more effective supervision and more effective definition and standardisation in this area. If not, the industry will at some stage in the future be accused again of misleading investors.
Do you think the recent strong rally in financial stocks following the losses announced by Royal Bank of Scotland signals a change in sentiment towards the banking sector?
Brown: We think the rally in financial stocks could reflect a change in sentiment at an institutional level as asset allocations are altered. At an individual level, investor sentiment seems to be focused on a company’s ability to deliver its dividend and therefore we feel sentiment has yet to experience a significant change.
At a composite level, continued uncertainty exists in the banking sector as balance sheets are shored up. We see this process contin- uing over the short term as negative newsflow from around the globe continues and both institutional and retail investors search for key indicators for the floor in banking stocks.
Lowcock: No, we have seen that there is still a lot of news to be published. Indeed, until the banking sector has finished reporting, expect a lot of volatility in the short term. After this, we may see some respite as the banks go quiet on their performance.
Urquhart Stewart: No, the fundamentals are still awful. RBS and other major banks are effectively zombie banks – alive but not doing enough. In my view, they are going to have to be nationalised in all but name.
Do you share Thames River Capital fund manager Gary Potter’s concerns that recent investor moves into corporate bonds could create a bubble? Should investors be wary of switching out of cash into corporate bonds?
Brown: There are probably two key measurements on a bond “bubbleometer” – running yield or capital growth over short periods of time. On a yield basis, a bubble would be signalled when little or no risk premium was required by bond investors. Despite last year’s widening of spreads and the subsequent decline in base rates, investors have not significantly lowered the premium they require for fixed-income investments in the corporate sector.
The fact that more companies are not issuing new debt, bearing in mind it is less painful and more tax-efficient than a rights issue, perhaps indicates that there is not irrational demand for debt.
As for rapid capital growth, we know what that has been driven by – falling interest rates. Any significant reversion in rates would pose a threat to investors.
The recent big inflows into the corporate bond sector are of some concern, particularly with the sector facing the potential for a significant increase in defaults. However, much relies on fund manager skill backed up by a good dealing team in finding and capitalising on opportunities. Investors should always consider the risks when introducing increased risk into their portfolio. However, when considering the returns that cash is currently delivering to investors, diversifying into quality corporate bonds may be worthwhile.
Lowcock: When there is a trend, there is always a risk that this trend could be transformed into a bubble. However, the recent moves into corporate bonds have not been so big to suggest there should be concerns yet. Indeed, there will be more issuance of corporate debt to soak up excess demand, so for the time being this will not be of too much concern.
Urquhart Stewart: Every fashion fad becomes a tanktop. This mantra for corporate bonds has been well worn for a year now. Yes, there are bubbles but high-quality triple-As can still provide certain opportunities.
Are single-country funds a good investment opportunity?
Brown: If an investor is speculative, there are plenty of opportunities within single-country funds but one must be aware of the source of return in these markets and whether there is an overdependence on one or two specialist sectors such as consumer cyclical or commodities. The investor must consider the possibility of not seeing a return to previous levels of demand. We would therefore argue that global thematic funds may be more appropriate.
Lowcock: This depends entirely on the country. The UK, US and Japan all represent big world economies with diversified company exposure and strong regulatory systems in place for investors. Other countries have more unknown risks, such as political instability or currency risks and unless an investor is well positioned to react to any developments, they could get caught out. Emerging markets are historically very volatile and a diversified approach allows this volatility to be reduced.
Urquhart Stewart: Single-country funds can provide far more precise geographical asset allocation and can be very helpful. Now we have more choice with some country-specific exchange traded funds as well.
Do you think it is a good thing that Edward Bonham Carter will no longer be running money for Jupiter since Patrick Harrington is to take over the undervalued assets fund from him? What will you be recommending investors do if they are in the fund or looking to go into it?
Brown: The rationale behind this decision demonstrates Jupiter’s commitment to placing investor interests first. We see this as a positive move, especially as Edward Bonham Carter remains chief investment officer at Jupiter, thereby continuing to be in a position to provide his unique input into the investment process.
Lowcock: We downgraded the Jupiter undervalued assets fund in October on concerns over Edward Bonham Carter’s ability to run the fund and the company. It is good news that he has decided to concentrate on one area, allowing a full-time manager to run client money. At present, we do not rate the fund and have no plans to meet the manager. We prefer M&G recovery.
Urquhart Stewart: It is a great shame to see Edward going but we will have to see how Patrick gets on. A new manager is a new track record, so investors should wait to see how he gets on.