The opinions and views expressed here are those held by the author as at 27 May 2015, which are subject to change and are not to be taken as or construed as investment advice.
Five years into a relentless global search for yield, rock-bottom interest rates have forced investors into ever riskier asset classes, causing asset prices around the world to look expensive, according to Talib Sheikh, Fund Manager of the JPM Multi-Asset Income Fund. In this Q&A session, we speak to Talib about the recent changes to portfolio positioning as he explains that the fund’s emphasis on seeking the best risk-adjusted income opportunities across the globe is more important than ever.
How has the fund’s asset allocation changed over time?
Before 2012, the fund held a diversified mix of equities and bonds, with a significant allocation to high-yield bonds. This was a reflection of the risk premia available in these asset classes during the post-financial crisis period, when virtually all risk assets performed strongly because valuations were low and risk premiums were high. These days, those risk premia are largely a thing of the past as quantitative easing has inflated asset prices. As a result, the JPM Multi-Asset Income Fund is now more diversified than at any time since its inception six years ago.
The fund’s ability to actively manage the trade-off between risk and reward as it navigates an increasingly fluid opportunity set is another important evolution. Nearly six years into a bull market in equities and more than 30 years into a bond bull market, many investors may now be more focused on chasing yield and return, with less attention paid to risk. We remain positive on risk assets overall and believe they can continue to do well from here. But running maximum levels of risk at today’s valuations is not the solution, so the fund has stayed true to its core objective: to deliver risk-adjusted income.
Have there been any recent changes to the portfolio?
As at the end of April 2015, we have increased our allocation to European equities, which we think offer attractive yields, decent valuations, and are significant beneficiaries of easy monetary policy. The ability to capture approximately 4.5 per cent dividend yield in Europe looks compelling relative to a current average 3 per cent dividend yield on the MSCI World Index.
As a reflection of our conviction, European equities currently make up approximately 50 per cent of our exposure to equities in the fund, which accounts for approximately 42 per cent of the total fund assets. This increased allocation has been funded predominantly from Global Equity to maintain current equity exposure and partly from emerging market (EM) equities given the asset class’s vulnerability to commodities and headwinds from a stronger US dollar.
Which stocks/sectors/holdings have done well for the fund?
Our high-conviction position in European equities has performed strongly. With our income orientation leading us to focus on dividend-paying stocks, this naturally leads us to higher quality companies with strong free cash flow, providing a relative cushion during periods of volatility.
We continue to have a high conviction in preference shares, which have also performed well. We often access preference shares in the US financials sector. While we limit our exposure to preference shares due to their relatively illiquidity, we are constructive on the fundamentals for the asset class, particularly as the regulatory environment suggests to us that they will continue to be well supported.
What stocks/sectors/holdings have detracted from performance?
Our underweight to EM equities and EM debt has recently detracted from performance as those asset classes have performed well. However, we are not prepared to increase our exposure to those asset classes at this point as we remain concerned about their vulnerability to headwinds. Macro-economic challenges from weakening currencies, declining commodity markets and fund outflows continue to weigh on investor sentiment and relative performance. While commodity weakness generally will be a headwind for most emerging markets, lower energy prices could benefit several emerging economies through lower inflation, lower trade deficits, and lower financing needs. At the end of April 2015 we have a modest allocation of 3.6 per cent to EM equities and we hold a 7.2 per cent allocation to EM debt, which offers a yield in the current low interest rate environment.
What’s in store for the rest of the year?
The last five years have predominantly been about investors selling fixed income-type investments in order to buy equity-type investments, largely incentivised by central bank monetary policy. We think we may be on the cusp of a new phase, in which investors begin to think about asset allocation less as a broad brush differentiation between asset classes and start to concentrate much more on what they hold within asset classes, as well as their regional exposures. In that context, we continue to drill down into regions such as Europe as part of the hunt for risk-adjusted income opportunities.
The much-anticipated first interest rate increase expected this year by the US Federal Reserve will come during a period of modest growth acceleration in the US and against a backdrop of extraordinarily accommodative monetary policy from the European Central Bank and the Bank of Japan. That’s why we think a tilt towards risk assets remains justified and that dividend-paying equities still offer the best prospects for attractive yield, as well as potential market upside participation.