At a time when the outlook for equities and bonds is clouded by slow global economic growth, Barings’ Sonja Laud has turned to property to boost yield in her portfolio.
Laud says the asset class is “a natural diversifier” with “strong income features” which are normally associated with traditional government bonds.
The portfolio manager has increased property exposure in the £19.7m Baring Multi-Asset Income fund 3 per cent in the last few months, taking resources out of equities.
The fund now has “a strong weighting” in property, representing 11 per cent of the portfolio.
Laud says: “Given that we are bumping around slightly below trend growth rates, it is very important that we are not missing any turning point in the economic data. As such I have been looking for asset classes that are negatively correlated, less volatile and offer yield profile, and property ticks most of these boxes.”
The fund’s property holdings include the £243m Standard Life Investments Property Income trust, which is the largest holding in the fund at 5.2 per cent, and the £316m Schroder Real Estate Investments fund, which represents 2 per cent of the portfolio.
Launched in July, Laud’s fund has 117 holdings and is one of the 12 multi-asset funds within Baring Asset Management’s offering. The range uses a similar asset allocation for all its funds, with reviews taking place every four weeks.
Barings’ current overall preference is for equities, which make up more than 50 per cent of the multi-asset income fund.
Within that exposure, Laud favours developed markets equities, particularly Europe and Japan, which represent 21.1 per cent and 9.4 per cent of the fund, respectively.
She says: “European equities are yielding very strongly and continue to be very supportive. But we prefer to invest in countries like Scandinavia.
“In Japan, despite yields not being very strong, we are focusing on companies with potential to raise dividend yields.”
European high yield stocks also look attractive for Laud as they continue to be supported by quantitative easing.
Earlier this month, the European Central Bank extended the €60bn monthly QE programme until March 2017 in an attempt to boost inflation.
However, Laud says: “Mario Draghi is not done. He wants to make sure he will achieve his objectives of reaching inflation targets. He also wants to make sure bond yields stay low but he has achieved a lot with QE already.
“Going forward, we need the QE support for longer.”
On the other hand, Laud remains cautious on emerging markets and is “very selective” picking stocks in the region.
Although she says there will be opportunities in 2016, investors need to be careful as emerging markets is “a very heterogeneous” asset class.
However, in Latin America she favours Mexican government bonds.
Laud says Mexico “is well positioned” as it will be less directly affected by a US interest rate hike. Mexican government bonds currently make up 2.5 per cent of the top 10 holdings of the fund.
Also in emerging markets, Laud has invested 1.9 per cent of the fund in Indonesian government bonds as the country’s domestic economy is improving and overcoming its “big government debt”.
German-born Laud comes form an equity long-only background having worked for both Deutsche Bank and Schroders. She helped set up Barings’ multi-asset strategy after joining the firm in 2014.
She says: “Income is one of the areas that will see a lot of demand in the future. The fund currently targets a 2.5 per cent premium annual income against the global equity market average following the MSCI All Countries World Index, which is the most stable indicator in the market.”
Laud argues while the market was prepared for a US rate rise on 16 December, she believes volatility will persist next year.
She says: “I also expect another hike in the first half of the year and then another one in June 2016.
“But with strength or weakness of the incoming economic data this might change. Volatility will increase because we simply don’t know if the economic strength will support rate hikes next year.
“Earnings momentum in the US has decelerated. Now, it is the first time that we’ll see the starting point of a rate hike cycle into a weakening economic environment and particularly into a weakening earnings environment.
“From here into the new year the question is whether there is room for a bit of relief. It will all come down to whether we see economic strength continuing and potentially accelerating.”