fund of fund managers give their views on next year and outline their portfolio positioning
Threadneedle, Edinburgh, M&G are increasing equity weightings in their multi-asset class fund of funds, while Rothschild's remains cautious on equities.
Others share Rothschild's caution such as Isis, or are avoiding asset allocation bets such as Hargreaves Lansdown. Investment Week's sister publication Multi-Manager polls fund of funds managers on how they are preparing for 2003.
Many groups are anticipating an end of year rally and are positioning their portfolios to catch any potential upside. With this in mind, John Chatfeild-Roberts, head of independent funds at Jupiter, said the group has increased the beta of its portfolios. Both Way Fund Managers and IMS are taking a similar view and have increased their exposure to large cap growth.
Richard Philbin, associate director at Isis, believes 2003 will be better for markets than 2002. 'However, we are still adopting a cautious stance,' he said. The group is still overweight fixed interest, although it has reduced this from a very overweight position. M&G has also repositioned its portfolios by buying UK growth and European smaller companies, and reducing its exposure to bonds. David Jane, head of equity investments, said the group has also identified a number of sectors that it sees offering improved returns; in particular global technology, media and financials.
Another group that views financial stocks in a positive light is Framlington. It has increased its Managed Distribution Portfolio's exposure to the sector to prepare itself for the investment climate in 2003. Neil Birrell, chief investment officer at the group, said this asset allocation move leaves the fund well positioned for 2003.
Bambos Hambi, head of portfolio services at Rothschild Asset Management, is less convinced that equity markets are on the up. The group has recently moved from an overweight equity to a neutral position following the outperformance of equity markets over the past two months.
Hargreaves Lansdown has not made any major changes but has changed its quantitative process slightly, according to its investment director Alan Durrant. It has also avoided taking any asset allocation bets.
Other groups have decided not to make any specific changes with a view to what may happen in 2003. Colin Robertson, head of global strategy at Threadneedle, said: 'We have moved less defensive in recent months as markets have fallen, so now we are broadly neutral in the defensive/aggressive mix.'
DWS Investments, too, has not made any changes to its process. Jonathan Arthur, director of investment management, said: 'We will continue to focus on uncovering situations where we believe that realistic future cash- flows are undervalued by a firm's share price. Because inflation looks set to remain low, future returns from financial assets are also likely to be lower.'
With so much caution and uncertainty around it is clear no one wants to be taking radical underweight positions in fixed interest in the short-term. Longer term, they remain believers in equities. Jupiter's Chatfeild-Roberts thinks the asset mix in his funds is likely to remain stable for the next couple of months.
Paul Wilcox, chairman of Way, said its portfolio's asset allocation will remain in line with IMA sectors.
M&G's Jane sees an increase in equities and a decrease in bonds. This view is echoed by Philbin at Isis, who said he is likely to reduce the defensive qualities of his portfolios.
'We will probably be reducing fixed interest and value-biased funds,' he said, 'be they equity income, or all companies type funds'. Framlington's Birrell also said that, for its Managed Distribution Fund, the manager will maintain a pro-equity stance.
Edinburgh Portfolio, too, intends increasingly exposure to equities, said Mark Harris, head of investment management. He also sees a move into higher risk bonds.
Threadneedle anticipates increasing equity exposure to overweight and reducing allocation to government bonds. Arthur at DWS said his balanced approach to asset allocation will remain largely unchanged.
Rothschild's Hambi is adopting a more cautious stance on equities: 'We are positioned for equities to consolidate after their recent run. Should that occur, it may be appropriate to increase our exposure,' he said.
'In terms of the split between bonds, equities and cash, we remain underweight cash and may go further in this direction as the economic and corporate backdrop becomes more certain,' said Gary Potter, director of multi-manager at Credit Suisse Asset Management.
The group is modestly underweight bonds and correspondingly overweight equities. 'We may also take this further given the bull market we have experienced in bonds versus equities over the last three years,' he said.
According to Chatfeild-Roberts, spotting the sentiment changes between recovery, double-dip recession and the spectre of deflation are key to producing successful returns. M&G's Jane believes the main bets are equity regions and asset allocation.
Philbin, though, believes that stock-picking will be vital. 'We will be looking to invest with funds and managers that are flexible,' he said. 'The market is likely to reward and punish stocks on an individual basis.'
The major themes to look for in Threadneedle's view, said Robertson, are the ability of the US consumer to maintain spending, of which he is sceptical, the continuing absence of corporate pricing power and how cheap equity markets will become. Paul Kim, head of research at IMS, said the key will be selecting good 'rotational' managers, who can take advantage of the changing economic cycle and market conditions. This also applies to Way's portfolios, which are run by IMS.
CSAM, said Potter, believes key themes would be to stick to the tried and tested experienced managers or to funds where there is maximum flexibility in the mandate to outperform.
'In multi-asset class funds the bond/equity split is key in the current economic environment,' he said. 'In underlying fund selection the trick is not so much identifying the star winners but avoiding torpedoes that can do far more damage.'
Birrell at Framlington sets out a number of steps he intends to follow. 'The first prognosis to get right is whether the economy will enter into a low growth scenario or will experience a double dip,' he said. This will determine the direction of equity markets, according to Framlington.
'Secondly it will be important to get the US weighting right,' Birrell added. 'And third, it will be vital to assess investors' aversion towards risk to get bets in technology and biotechnology right.'
He echoes the others in stressing how important it will be to avoid disappointing stocks.
Harris at Edinburgh said: 'You need to let the markets tell you where to position portfolios.'
Rothschild's Hambi picks out cyclicals: 'If sentiment about the global economy improves, a rally in cyclicals is possible,' he said. 'However, flexibility will be crucial in this environment and, for the time being, we are running very balanced portfolios.'
He is cautiously optimistic on the prospects for the global economy and, he said, if the level of uncertainty diminishes he will move rapidly to reposition with a more pro-cyclical emphasis.
Jonathan Arthur at DWS advises avoiding style and sectoral biases, as the market is likely to remain vulnerable to frequent, sharp sentiment rotations. He believes portfolios should position for gradual economic and corporate earnings recovery.
Chatfeild-Roberts holds a similar view. 'We expect equity markets to trade sideways but for there to be opportunities for stock pickers to make money,' he said.
Wilcox predicts low growth and sluggish economic recovery but said there is also likely to be substantial upside volatility in equity markets.
Harris agrees. 'I expect a tough operating environment globally. Equities should outperform cash and bonds but with high levels of volatility attached.' M&G expects the UK and Europe to be stronger than the US.
Hargreaves Lansdown also favours the UK over the US but is less bullish on Europe.
'The euro is placing pressure on countries such as Germany and the question in the US is how long US consumers will continue spending,' said Durrant.
Robertson expects a decoupling of non-US equity market performance from the performance of US equities.
Birrell is positive about the UK, saying it continues to offer investors stability against a global background. Valuations are becoming more attractive in the US, he said, although the outlook for revenue growth is low due to low inflation and consumption growth.
Europe could be boosted by consumer spending, said Birrell, and if it continues to underperform it will become attractive on valuation terms.
If the rally in global markets continues, Birrell believes the place to be is the Far East. Arthur at DWS believes equity risk will be increased by the current geopolitical situation. He expects a rebound in US equities, although his medium term outlook is still cautious.
In Europe, Arthur said equities look cheap, with the inflationary outlook aided by a stronger euro. In the UK, Arthur points to director share buying as proof that downward earnings' revisions are too extreme.
How are your fund of fund products split between large, mid and small caps?
Axa MultiManager: No split.
CSAM: We do not take large bets. We have been underweight larger caps for much of 2002, tilting to mid and small caps, particularly in the UK and US portfolios.
DWS Investments: Where underlying funds invest in equities, these are benchmarked against indices that emphasise large caps. The funds have no style bias towards capitalisation bands, so market capitalisation exposures are indicative.
Edinburgh Portfolio: Managed Growth Portfolio:
Top 40% of market 32.5
Next 40% of market 39.1
Bottom 20% of market 28.4
Managed Portfolio: Small (43.2%), Medium (11.95%), Large (44.85%)
IMS: Overweight mid/small cap, but raising large cap exposure.
ISIS: The FP Multi Manager Balanced has no dedicated smaller caps while the FP Multi Manager Growth has 3.47% in smaller cos, but no dedicated large or mid-caps.
Jupiter: Biased to mid cap.
CSAM: We do not take large bets. We have been underweight larger caps for much of 2002, tilting to mid and small caps, particularly in UK and US portfolios.
Rothschild Asset Management: Tilt away from mega-cap stocks towards the mid/small caps. We only take small positions.
How are they split between value/growth?
Axa MultiManager: We have no growth or value style bias.
CSAM: We make a conscious effort to control style bias in our portfolio as we currently view the market conditions as not rewarding investors for taking on too much style risk. We would have bias towards value in our equity income fund.
DWS Investments: DWS Managed Portfolio Fund's underlying funds seek positive risk-adjusted returns by choosing shares based on a pragmatic and balanced style, an approach categorised as blend.
Edinburgh Portfolio: Managed Growth Portfolio (Neutral),Fund of Funds Portfolio (Neutral), Performance Portfolio (Neutral), Global Growth Portfolio (Neutral), UK Growth Portfolio (Value moving to neutral), European Portfolio (Growth), American Portfolio (Neutral), Asia Portfolio (Neutral), Japan Portfolio (Neutral)
FRAMLINGTON: Our investment philosophy is growth at a reasonable price so generally all our funds are growth-oriented.
IMS: Fairly balanced barbell, with defensive bias.
Rothschild Asset Management: The fund of funds have positive indicators for both growth and value, which in aggregate leads to a growth at a reasonable price position.
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