Mark Wright, co-manager of the CF Midas Balanced Growth fund, reveals the evolving themes playing a key role in his portfolio construction.
Amid volatile markets, it can be difficult for investors to spot trends as they evolve before them. Yet it is crucial in the pursuit of long term capital accumulation, as it is these trends that dictate future asset class performance. Below are just a few trends that we have been taking note of and investing accordingly.
1. Financial repression is supportive to equities
Unconventional monetary policy by the world’s most influential central banks has created an investment landscape where near zero interest rates have become the new norm. Low interest rates serve not only to ease the interest burden for debtors and allow balance sheets to be repaired, but also to ultimately push cash flow starved investors into riskier, higher yielding assets.
It takes time for this secondary effect to bed down into investor psyche, but we believe that it is now beginning to happen. Equities are starting to be appraised on their dividend paying capacity, as low interest rates combined with investor panic has squeezed the last remaining ounce of value from alternative, safe haven assets such as government bonds. The need for yield should provide a supportive bid for the market in times of economic stress, therefore reducing the downside for equity markets. Equities continue to have a significant allocation within our Fund.
Three investment trends boosting returns
We have identified three powerful sources of alpha when investing in UK equities. We either invest in those companies that provide exposure to a theme towards which we have high conviction (such as emerging market consumerism). Or we invest in those which have a proven, solid business model that enables them to consistently earn returns that substantially exceed their cost of capital, or which have a management team with a new strategic focus that aims to improve the business’s operating and financial performance.
Outside of the UK, we entrust our investors’ money with those fund managers whom are prepared to deviate significantly from their benchmark, have a proven track record and/or provide exposure to a theme that we wish to be exposed to. We use both investment boutiques, such as Prusik (Asian Equity Income) and larger specialist asset managers, such as Wells Fargo (US All Cap Growth Fund).
2. Industrial metal prices are in a secular bear market
Rapidly rising industrial metal prices had been a fairly persistent trend over the last decade, albeit with a temporary period of weakness around the collapse of Lehman Brothers. Consequently, they have attracted vast sums of money as investors have sought to diversify their investment portfolios, protect themselves against inflation and hope to reap large profits from a continuation of the trend - commodities have become an asset class in their own right.
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