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David Hambridge: The misprice is right

The spectacular rally in stockmarkets has been referred to as the dash for trash, with cyclical and geared companies enjoying the biggest rally.

I find this expression strange, given that an important factor in any investment decision is the price of the asset.

Looking back six months or so, there were many companies whose outlook was being described as somewhat “binary” and in cases this was true but the crisis has thrown up some exceptional opportunities, in particular, for multi-asset funds.

Emerging markets and commodities would have paid off but I do not know many willing to make this call last winter.

Our strategy this year has been to concentrate on assets we felt had become mispriced rather than second-guess the direction of markets and this has paid off. We have been overweight in global convertibles. This asset class had a dreadful second half last year with the price of many issues falling through their bond floor, largely as a result of forced selling by hedge fund managers. It is not often you get a free lunch in asset management but convertibles have given us just that over the last few months.

Another asset class that was hit hard last year was corporate bonds, pricing in unprecedented default rates. High-yield issues have produced exceptional returns so far this year but our strategy has been to concentrate on investment-grade bonds which we felt offered compelling returns for a much lower level of risk.

The third area where we have benefited is structured products. Many were hit in the Lehman crisis but a number of our structured products have produced exceptional returns this year.

We believe we have seen the best of the returns from credit and are wary that the market is likely to become more correlated with gilts (which we continue to avoid). We still see value in some financial bonds and demand is likely to remain strong for some time. We remain comfortable with equities, in particular, stocks that have strong balance sheets and a strong franchise, while commercial property is starting to look interesting again.

David Hambidge is investment director of pooled funds at Premier Asset Management

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