In its annual Keynote Briefing for investment intermediaries and institutional clients, Royal London Asset Management (RLAM) yesterday outlined ways in which investors can exploit investment opportunities in a world of low returns.
RLAM's economist, Ian Kernohan, set the tone for the event, describing an environment of persistent low growth and extreme volatility. Against this backdrop, investors should base asset allocation on a sound analysis of potential outcomes and challenges presented to them, rather than on an inflexible market view.
The Keynote Briefing showcased RLAM's award-winning expertise across major asset classes, with breakout sessions hosted by a range of fund managers who gave their outlook for fixed income, equities, property and cash.
Equities
RLAM's Head of Equities, Jane Coffey, introduced UK equity income manager Martin Cholwill and UK growth manager Derek Mitchell by emphasising the importance of timing an entry into equity markets based on valuations. Within an historic context, US, UK and European markets are undervalued, suggesting a strong potential for above average returns. Cholwill, manager of the Royal London UK Equity Income Fund, explained his preference for companies with strong management, good cash flow and the ability to deliver long-term dividend growth. This recognition of the importance of dividend growth as part of a stock's total return was shared by Derek Mitchell, manager of the Royal London UK Mid Cap Growth and UK Opportunities funds. While he remains defensively positioned with weightings biased towards consumer staples, telecoms and pharmaceuticals, he also favours certain industrials that are well-placed to take advantage of the current economic environment, as well as companies whose earnings are derived from important overseas markets.
Fixed Interest
Jonathan Platt, RLAM's Head of Fixed Interest, dispelled four myths commonly held by bond investors. First, he argued that despite sentiment to the contrary, government bonds are not in a bubble - their lower yields are a mechanism of downward-trending nominal GDP, not investor over-enthusiasm. Second, price volatility of index-linked bonds is largely a result of increases in capital rather than inflation or interest rates. Third, Platt suggested that sterling fixed interest benchmarks cannot be viewed as a proxy for the UK economy: the reach of their constituent names is more global than domestic and while equity benchmarks are more heavily weighted to fewer stocks, the ten largest UK equities account for less than five per cent of all main maturity credit indices. Summarising these points, he maintained that there is real scope for active managers to add value within fixed interest mandates.
Platt outlined RLAM's current market outlook, with a preference for corporate over government debt, a short duration position and overweight positions in global and index-linked bonds. Overall he highlighted a bias towards highly-covenanted and secured debt.
Property
Stephen Elliott and James Orr, managers within RLAM's award-winning property investment team outlined their approach to active asset management. They argued that in an environment of decreasing lease terms and low returns, such active management is essential in securing strong income. However, they also emphasised the importance of exploring new sectors to act as a balance to this trend, highlighting the hotel and student accommodation sectors where leases are typically longer. In addition, they underlined the importance of tenant diversification to protect against downturns in specific areas of the economy.
Cash
Chris Chudley, Investment Director of Royal London Cash Management (RLCM), outlined the changing nature of the cash market, commenting that with interest rates at record low levels, sovereign risk more prevalent and a reduced number of active counterparties, security is of paramount importance. He also noted that the yields available on Certificates of Deposit are attractive relative to market expectations and offer value in the current market climate.
Robert Talbut, RLAM's Chief Investment Officer, said,
"Our annual Keynote Briefing continues to prove an invaluable means for our fund managers to explain their views on markets and how these translate to asset allocation decisions through active investment management. Given the interactive nature of the event, it is also provides us with an excellent barometer for the sentiment and concerns of our clients. As markets look set to remain uncertain for some time to come, this exchange is of paramount importance in helping to ensure our investment solutions continue to be in line with client expectations."
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