Johanna Kyrklund, manager of the Schroder Managed Balanced fund, tells Rebecca Jones why she is cautiously bullish on Europe...
1 What has driven the fund’s strong outperformance over the past five years?
As dreadful as 2008 was, it also left markets looking extremely cheap and provided a major opportunity to accumulate equities at attractive prices. In addition, we also benefited from very attractive valuations in credit, particularly in high yield debt. Therefore, an emphasis on valuation is what has driven our performance.
2 What is your investment strategy and how rigidly do you stick to it?
Our emphasis is on harnessing the long-term return potential of equities, while allowing some flexibility to make diversifying investments in government bonds, high yield debt, investment grade debt, emerging market debt and absolute return strategies. We then combine our asset allocation expertise with the specialist capabilities of our colleagues at Schroders, who aim to exploit opportunities at security level.
3 Has being within a higher risk sector dampened or enhanced your return potential over the past five years?
“ A quality-oriented strategy in Europe is appropriate ”
Recent years have favoured the brave, so I would say that being in a higher risk sector has enhanced our return potential. It has not always been easy, however. For example, emerging equities significantly lagged global equities last year, so you had to be focused on the right areas of the equity market to make money.
Similarly, although Europe has recovered strongly since 2008, it clearly had a major wobble in 2010 and 2011 on sovereign debt concerns. In this case, we not only kept on top of valuations and economics, we also had to analyse a swiftly changing political environment.
4 Currently, you hold Schroders funds exclusively. Is this merely to keep the annual management charge low, or because you believe the funds are superior to others?
There is certainly a benefit to the annual management charge of keeping investments “in-house” but it is also justified by the breadth and depth of capabilities we have here, as well as our intimate knowledge of our in-house funds.
5 Your highest allocation is to the Schroder European Alpha Plus fund. Are you bullish on Europe?
Yes, we see the potential for upside surprise on European profits but our allocation to the Schroder European Alpha Plus fund reflects our belief that, over the medium term, the outlook for Europe is likely to be difficult, making a quality-oriented strategy such as European Alpha Plus appropriate. When you take into account our futures positions, our highest allocation outside of the UK is actually to US equities, reflecting our view that the US economy continues to offer the best trade-off between growth and inflation.
6 How nervous about markets are you at the moment?
Our allocation to cash is around 5% and we have reduced risk somewhat. We still think the asset class of choice is equities but we need to recognise that valuations are not as supportive as they were, so we have started to introduce some protective positions as well.
7 Where are the best opportunities in global markets?
We continue to favour European and US equities, as we see an ongoing improvement in corporate earnings. The US offers the most benign macroeconomic environment, with loose monetary policy, easing fiscal policy and improving credit conditions.
Europe, on the other hand, has a more challenging economic outlook due to the need to restore competitiveness in the southern economies. However, profits are below trend and companies are operationally geared into any improvement in top line growth.
The “search for yield” also remains a prominent theme, with interest rates pinned at zero by central banks. However, we need to recognise that valuations in high dividend equities and high yield debt are stretched, so we are gradually taking profits.
Finally, relative valuations are starting to favour emerging market assets. The emerging economies face tighter domestic credit conditions and political risk remains elevated.
We have started to bottom fish in this area through our investment in the Schroder ISF Emerging Market Debt Absolute Return fund, which looks to benefit from emerging market debt and currency trends, but with an emphasis on absolute return.
The CV: Johanna Kyrklund
Johanna Kyrklund is responsible for investment on behalf of all UK, European and US multi-asset clients and manages the Schroder Diversified Growth funds. Prior to joining Schroders in 2007, Kyrklund worked at Insight Investment, where she managed a global absolute return fund. From 1997 to 2005 she worked at Deutsche Asset Management where she was head of asset allocation in the UK.
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