The perceived crisis in emerging markets and deflationary risk in European equities may prove uncomfortable positions in the near term but Thomas Miller Investment head of private client investment management Harry Morgan and his deputy, Andrew Herberts (pictured), are riding it out to reap the rewards of structural reforms and long-term growth.
The wealth manager runs a range of six investment profiles. All six began the year slightly overweight equities.
But this exposure has recently been pared back as a temporary measure following strong performance in equity markets during April and short-term weakness in some leading economies.
“What we are seeing near-term is a slight pull-back in some of the key leading market indicators, both in the US and in China, which suggests over the next six months or so you may see growth slow in both economies,” says Herberts.
“Equities also did well in April, with the best-performing market globally being the FTSE 100, so what we have done is ease back on equities to take a little bit of risk off
Despite this, Herberts believes the global economy is on the road to recovery in the long term. He says: “We think the global recovery is here and it will prove sustainable.”
But to fully underpin economic recovery, says Herberts, greater confidence is needed among corporates and an uptick in capital expenditure.
“A recovery in capital spending long-term would be very positive because it embeds the basis of the recovery. I don’t think this has happened yet but I think it is going to.
“The UK recovery is broadening out but it is difficult to argue that the key driver should be led by consumer confidence and not corporate confidence,” he says.
The wealth manager’s balanced investment profile has 50 per cent in equities, three-fifths of which is in UK equities and the remainder split between the US, continental Europe and global emerging markets.
Sticking with emerging markets
While not a major position, the portfolio has maintained its exposure to emerging markets through the latest bout of volatility in the belief that it offers long-term opportunities.
“We are not overweight emerging markets but we are certainly not spooked in the way some of the competition have been and we are sticking with our positions,” says Morgan.
“It is a really good asset class for private clients to invest in because it makes you be long-term. There are very few areas in private client portfolios that are genuine lock-away areas like this one.
“We really believe in the long-term emerging market story about demographics, consumer culture, manufacturing capabilities and population growth.”
Herberts stresses the importance of selecting active managers in the emerging markets space who are able to avoid economies with major structural issues, such as China.
“We share some of the concerns over the structural issues in China so we want to go to managers who can manage away from that rather than just buying the emerging market
index, which has about 50 per cent in China,” he says.
Deflationary risk in Europe?
European equities have also proven uncomfortable in the near term as investors put their faith in the European Central Bank to take the right action against deflation in the region, says Herberts.
“It is very difficult for investors to make a call on the deflation risk in Europe because, ultimately, it is going to rely on the ECB to make the right calls.
“They have made the right noises so far but we are not convinced they will follow through with the kind of action that we would like to see,” says Herberts.
“It is a bit of an uncomfortable position at the moment but if the ECB gets it right, Europe should be a good place to be and you might get the currency going your way as well.”
The portfolio holds what Morgan calls “index-plus” European funds such as the £2.2bn Threadneedle European Select, while Herberts has recently been buying the £267m Argonaut European Alpha fund for new clients for its exposure to peripheral Europe.
Eyeing potential opportunities in index-linked bonds
Looking ahead, Morgan is considering the potential opportunities in index-linked bonds as a “cheap way of getting inflation protection” following a meeting with £871.1m M&G UK Inflation-linked Corporate Bond manager Ben Lord.
“Ben said the gilt market is telling you in a low-inflation world you are better off in conventional bonds. However, if somewhere down the line RPI climbs above 3 per cent,
you will make a capital gain on index-linked bonds or any corporate bonds that are in index-linked form. So this is a way of getting cheap inflation protection,” says Morgan.
“We are not moving on this yet and the fund is on our watchlist but we would kick ourselves if three years down the line inflation suddenly blipped up to 4 per cent as the economy normalised and we hadn’t taken action.”
About Thomas Miller Investment
Parent organisation Thomas Miller dates back to 1885 but its private client portfolio service is much younger, having launched in May 2013.
The move was designed to offer clients a low-cost portfolio service following the RDR. Each of the portfolios has an AMC of 1 per cent a year plus VAT.
The company also manages assets for insurance mutuals, charities, pension schemes and Government, with total FUM above £2.5bn.
Head of UK private investment management Harry Morgan says a key question for clients continues to be: “Do I invest away from cash or not?” His team therefore deliberately avoids taking big bets when allocating across assets while its investment approach also has a “real top-down feel”, which is combined with bottom-up analysis.