Fund increases weighting in Europe and Asia, as higher interest rates in UK and US leave consumers unwilling to spend
With the UK and the US economies heading for a slowdown, the CF Miton Special Situations fund is favouring cash, Europe and Asia.
The product, co-managed by Tom McGrath and Martin Gray of MitonOptimal Asset Management, has achieved strong results with a 19% return over the past 12 months. McGrath believes the secret to this success is using a top-down approach and then choosing quality funds.
When looking at regions, McGrath continues to err on the side of caution when it comes to the UK and the US.
He explains: "In these markets higher interest rates in the UK (4.75%) and the US (5.25%) have left consumers unwilling to spend. Although house prices are strong, the consumer can no longer re-borrow because of higher costs.
"Because they no longer spend money on goods and services, the economies will slow."
To hedge his bets against a slowdown in the UK market, McGrath has invested in the Close AllBlue fund of hedge funds, managed by Blue Crest Capital Management.
"This vehicle provides the portfolio with protection through diversification because it is invested in several different asset classes," he says. "By having returns that are not correlated to each other, the product will help protect the fund from volatile market conditions."
McGrath is also holding cash, having opted for this strategy earlier in the year to ride out any further volatility in global markets, following the downturn in May.
"There is uncertainty about how long the downturn will last," he adds. "Although it is probably not the start of something more unpleasant, it has been driven by global inflationary concerns. It is probably better to stay in cash until the situation becomes clearer."
By comparison, one area McGrath is positive on is Europe. He says the region is not as economically mature as the UK and US and therefore offers a number of opportunities.
"As a result of companies cutting costs, corporate profitability has now improved and companies are beginning to re-hire staff," he says.
On the back of this, McGrath continues to increase the fund's weighting in the region. Furthermore, some company dividends pay around 4.6% compared to bonds at 4%. It is for this reason, he is considering investing in the Resolution Europe Income and the Zenith European Income funds, which specialise in high dividend yielding companies.
"Elsewhere around the world, the Far East is looking good because there is more growth and less debt in Asia compared with more developed societies," he says.
"Companies are now shareholder friendly, corporate governance is improving and they look to be positioned to capture long-term growth in the region."
According to McGrath, Japan offers the most potential in the region as it emerges from deflation. Corporate profits have been improving and consumers are beginning to spend money again. Funds expected to do well in this environment, predicts McGrath, include Thames River Japan, Legg Mason Japan and CF Morant Wright.
"In China, the A-Share Chinese exchange is providing the fund with diversity because it does not perform in line with other stock markets," says McGrath.
"Managers have to apply to trade on the exchange, which can be complicated and lengthy. If they sell out of this market, it may be a difficult process to get back in and managers will not sell unless it is necessary."
Consequently, McGrath has invested in the Martin Currie China A Shares fund. Its local team understands the domestic market and speaks Mandarin.
He also considers Australia as another positive addition to the Asia story. He explains: "The region is rich in natural resources and has had good returns on the back of the commodities boom.
"In particular, gold has become an important theme in the portfolio because it is a hedge against a falling dollar and inflation. It is also an insurance against terrorist activity because the commodity performs well when geopolitical tensions increase."
McGrath has invested in the Luxembourg-domiciled Merrill Lynch Gold & General portfolio, which has a 16.8% weighting in Australia. He is also considering investing in a fund run by Perth-based natural resources specialist Oceanic Asset Management, which he believes is positioned to capture any gains from a booming commodity market.
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