349. Where to find opportunities as markets broaden in 2025

6 March 2025 (pre-recorded 26 February 2025)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we’re taking a closer look at the latest shifts in global markets, exposing the evolving landscape of equities, bonds and opportunities beyond technology.

Chris Salih (CS): I’m Chris Salih and today we’re joined by Simon Nichols who manages the Elite Rated BNY Mellon Multi-Asset Balanced fund. Simon, once again, thank you very much for joining us.

Simon Nichols (SN): No problem. Good morning.

[INTERVIEW]

CS: And to you too. So I think the last time we spoke on this podcast was the backend of 2023, and so much has happened since then. So given your wide remit, maybe just start with – you have a focus on large-cap – just give us your view on the global equity market as it stands at the moment from a sort of top down view.

SN: Sure. Yeah. So big question. I guess what we’ve seen over the course of the last 12 to 18 months since we spoke last time, is a good performance from global equities largely driven by US equities. And then I guess within that driven by some of the technology companies which as I guess many people know, has been driven by the new wave of innovation in artificial intelligence. We have had some of those companies within the portfolio. I think as we look forward technology companies, as I said, have performed well, but there is some concern building, I think, in the market and amongst investors around the amount of capital investment that has been put in place particularly by some of the larger hyperscalers and the return on investment that that capacity may deliver in the future.

And so we have seen over the course of the last six months or so, some of the larger Magnificent Seven companies the performance has stall a little bit, and I think it’s really around that concern if they can achieve the required return on the investments that are going in so that that’s something juries out on. And, you know, potentially we will start to see some of those returns coming through as we move into the second half of this year and into next year.

CS: Well, maybe let’s just sort of focus on that because I think when we talked 18 months or so ago, you were sort of quite confident that tech could continue to perform, and we’ve seen AI since then, and that’s come to fruition. But the discussion has been that the market may start to broaden a bit more and we will see dispersion as we see some winners and losers in tech higher. And that higher end, given where valuations are, is that starting to reflect in your portfolio? Are you diversifying a bit more away from tech or are you sticking with some of the two or three names? Just give us a bit of an insight in what the trends are in your portfolio with regards to tech at the moment.

SN: Yeah, so I think that is what we’ve seen within the market. We saw last year that the the broader S&P index outperformed the equal weighted index by some margin. And I think as we started this year, as I said, some of those tech names have started to stall a little bit. And certainly in the first, you know, six weeks, two months of this year the equal weighted S&P 500 has outperformed the broader index. And, you know, the broader index has also outperformed the NASDAQ, which is producing negative returns as we stand today.

So I think what you’ve said there is actually starting to play out in markets within the portfolio. You’re right, we have had a reasonable exposure to technology companies. As you know, we are long-term investors and we do think that this is a pretty significant change that we’re seeing with this new AI technological way. So very much believe that over the longer term the technology companies will continue to produce good returns. But we have over the shorter term been bringing back some of our exposure in some of the technology names that have performed very well for the portfolio over the course of the last 12 to 18 months.

And if we look at new additions into the portfolio they have been away from the technology space. We’ve added new positions over the course of the last three to six months or so, perhaps in some consumer names with exposure to different geographies. So China, for example we have taken advantage of some weakness that we saw, and I’m sure we’ll come on to speak about the US elections last year. But we did see some weakness in some healthcare stocks with the the potential and now actually a appointment of RFK as health secretary. And so we took advantage of some of the weakness there in some vaccine names to add to our positions. And so yeah, I think, you know, certainly within the portfolio there has been a a reduction in some of the names that have performed well for the last two years and perhaps a broadening in new names into other areas.

CS: Just before we sort of move on, I want to have a couple of quick follow ups on that. Firstly I mean, I’m looking at your factsheet here, you’ve got quite a decent exposure to the UK. Where are you seeing the value from a geographical perspective? Are you quite strong in the UK? Is that somewhere you’ve been adding to recently? Maybe just give us a bit of insight towards that market as well.

SN: Yeah, so we don’t tend to look at things geographically. We very much tend to think about things from a bottom up basis and not too concerned in terms of where companies are listed. You are right in terms of saying that Europe and the UK, if we think about valuation on a standalone basis the multiples tend to be cheaper. But you know, we always look at that relative to future prospects and the growth outlook for the companies that that we’re investing in. And so we, we don’t look so much on that regional basis.

I think we do have a reasonable exposure to UK listed companies. And we do have some exposure to European listed companies, but they tend to be the ones that are very global in nature. And so when you look at our UK exposure, for example, there’s a quite a small proportion of the fund that is invested in domestically exposed UK companies.

CS: Okay. And I guess just lastly on equities, obviously you’re very bottom up and focused, but we’ve got this Trump overhang of the market at the moment. I think it would be remiss to not sort of mention that and maybe get your view on whether that impacts those companies. You mentioned that a lot of them are globally focused. I mean, UK perhaps slightly gets away, but there’s a lot of them that are gonna be worried and looking over their shoulders over this thing. Does it come onto your radar at all? And even if it doesn’t, maybe just give us your opinion on it and how that’s gonna play out to the degree.

SN: Yeah, I think it definitely comes onto our radar. I think the difficult part is trying to invest behind lots of uncertainties. And so, you know, we see a number of announcements coming out of the Trump White House which may or may not get implemented. And there are ways that the companies themselves will try to limit the impact. And so thinking particularly about tariffs. Of course there are going to be companies within our portfolio that may be subject to tariffs if they trade in the US market. And I think what we need to try and do is think about local, for local production how those companies can mitigate any tariffs that may or may not be implemented. And then importantly try and invest behind those companies that have got pricing power. And so that if they are impacted by any change in regulation or tariff or taxation, that they have the ability to try and pass those increased costs on, or be able to change their supply chain structure to mitigate the effects on on their profitability. So that, that is all very much top of mind, but at the moment I think we’ve got lots of uncertainty and, you know, not a lot that you can actually invest behind here because we don’t really have the policies in places as yet.

CS: Okay. And just last one on equities, I should have come back to it on terms of the broadening out. Are there types of companies that you’re focusing on or sectors, maybe just give us an example of the sort of things you are looking at in terms of that broadening in a bit more detail?

SN: Yeah, I think the market, and we’ve certainly seen this over the course of the last couple of weeks. We have got overweight positions in the industrial space, and I think many of the industrials companies have been caught up, if you like, in the AI wave of investment. And so it’s not just the tech companies that have benefited from this new AI wave, it’s all those companies that are building out infrastructure data centres power companies, et cetera. So there, there has been an element of broadening out of that tech wave away from the technology sector into some of the industrials into some of the utility companies already. And we have benefited from that.

I think, you know, when we talk about where we’ve been adding positions in the portfolio, it has been more in the healthcare space, which has lagged a little bit and as I said, more in the the consumer area which again has in certain areas has lagged and, you know, may maybe we need to think a little bit more about geographic markets, China, et cetera in terms of perhaps where some of those opportunities are.

CS: Okay. The portfolio can also invest in bonds all over the world. Maybe let’s focus on that. I mean, so we, again, we talked back in the 2023 we saw estimations of significant cuts in rates at the start of 2024 that perhaps didn’t come to fruition. Maybe just talk us through what that’s looked like for the portfolio in the past sort of 16 to 18 months. Has there been a case of reducing the allocation because you felt those rate cuts were coming through and subsequently have been been adding again because that’s not come to fruition? Maybe just talk us through the timeline really for that over the last 18 months.

SN: Yeah, so over the course of the last 18 months, we’ve becoming a little bit more constructive on bonds. Obviously if we go back to the zero interest rate policy era, we had a period of very low interest rates, very low yields on the bond markets and perhaps irrational buyers of bonds where central banks were buying bonds for policy reasons. I think as we’ve seen inflation come back and as we’ve seen central bank buying, you know, step away from the bond market, the returns on bonds have had to be justified to a rational investor.

And I think as we move into yields in the UK and the US on, you know, 10 year bonds, let’s say, of between 4% and 5% you are being at least compensated for an element of inflation. You are being compensated depending on your view of where inflation might be in the future for a real yield. And that’s a big change in markets. We have moved from negative real yields to positive real yields. And then certainly if we look at the UK market from about two years onwards, you have an upward sloping yield curve which introduces a term premium for investors.

So I think, you know, when you build up the returns and the risks that you face as a bond holder, the yields in the 4% to 5% range start to look a little bit more rational. And so we have been adding some bonds into the portfolio very, very gently over the course of the last 12 to 18 months because, you know, of course governments are running fiscal deficits. So there’s no real shortage of supply of government bonds and we have had a big buyer of bonds step outta the market. And so the demand for bonds needs to be fulfilled by as I say, other buyers than central banks. And you know, when we look at debt to GDP levels, that that’s a little bit different than it was last time. We saw interest rates at these levels maybe 10 to 15 years ago. So I think, you know, the balance has changed both on the supply side and the demand side and on the pricing of the bond market.

CS: Okay. And just in terms of duration, could you just give us your view on that in a bit more detail as well, please?

SN: So we look at duration relative to the overall gilt index and relative to US treasuries, obviously the gilt index has got a higher duration than, than the US treasury market. But when we look at the bonds that just, just the bond part of the portfolio that that we own, our duration on a weighted basis will be round about eight years now. And that has been stepping up gradually, as you say, over the last 12 to 18 months.

CS: Would you say that’s a duration goal? I mean, there’s quite a lot of dispersion, I guess, in the market in terms of views on duration at the moment, you’ve been, I guess adding to it do things like the fact that the US fiscal debt plans to tackle it, is that gonna take longer than people perhaps think it might do, and maybe the long end is perhaps more attractive as a result? Maybe just tell us a little bit about that as well, please.

SN: Yeah, I mean this is when we start to need to think about the risks and the rewards of owning bonds. Clearly if we look at the US market the forecasts from the the CBO in the US are for you know, the government to run fiscal deficits into the future, you know, reasonable levels, 6% or so levels, I think are our current forecasts. We then have, you know, the Trump administration and the overlay of Doge and the cost savings and the big numbers that are being put out into the market. And so I think if we do start to see an element of government efficiency and spending start to come down, that may help that fiscal deficit number. But on the other side, we also have some structural issues like the aging population, higher medical costs, higher social costs.

We have higher interest rates now. So the interest bill for the US is building. So there are puts and takes on both sides of those things. But certainly if, you know President Trump and Elon Musk deliver on those Doge numbers that they’ve put out into the market, maybe that will help the the fiscal deficits in in the US and may be supportive for bond markets from a fiscal point of view. But on the other side, you know, we don’t know what tariffs may do for inflation. And that again is a risk for bond holders obviously but moving forward. So yeah, lots of things to think about, I think with with bond investing.

CS: Well, I’ll come back to tariffs in a moment, but just quickly in terms of the portfolio itself, you seek a balance between the sort of capital income income and capital growth over five years. In terms of the income element, is that almost a byproduct of the portfolio? Is it because income’s easier to achieve now than perhaps it was? Are you being, is it giving you more freedom to look at some of the growthier names in the portfolio as to sort of focus on growthier names in the portfolio as well?

SN: I guess in theory, yes. But really in practice we tend to look at the total returns and how we build up the expected returns from any investment that we put into the portfolio. There will be an element of the portfolio that invests in companies that don’t pay a dividend. And you know, when we look at our expected return from those companies, it will tend to be from the growth that those companies can deliver. There’ll be another part of the portfolio that probably has a much lower variability of expected earnings returns, but a much higher payout ratio and therefore a higher dividend yield. And therefore when we think about the expected returns on those investments, the dividend yield will form a much greater proportion of the total return that we’re expecting.

And as you rightly point out, if we’re investing in bonds now with yields of, as we said, you know, between 4% and 5%, that certainly does help the the income generation of the portfolio, but I don’t think there is a conscious move for us to say, okay, bonds are yielding a little bit more, let’s now move the equities into a growthier equity phase. That’s not something that we’ve consciously done now.

CS: Okay. And I just wanna finish with back sort of full circles. We sort of talked about the outlook and I wanna finish on that. In terms of what’s been going on with Trump and tariffs and the extra macro that’s been going, all the noise that’s been going on for you, is it easier to ignore, harder to ignore the top down than perhaps it was in the past? Do you or are in terms of company focus, do do you sort of find it still quite a case of, you know, company by company? We can still build portfolios quite well because we know these businesses can survive any sort of macro that gets thrown their way?

SN: I think that’s right. You know, we try to build the portfolio with those companies that have got, you know, good market positions in industries that have got an element of structural growth behind them. And so yes, of course when you see a change in political regime anywhere, they can change the structural growth that we were expecting. And perhaps we’ve seen that maybe in the US in some of the renewable names over the course of the last year or so. But looking at the the longer than three year, four year term of the, the next president then, you know, investing behind those companies that we believe are providing products that fulfil a need and are continuing or will continue to fulfil a need into the future that have got those strong market positions does actually help you block out the short term, the short term noise. Of course, quarter by quarter, those companies are gonna get thrown around in terms of what’s the next quarter result going to be. But I think if you look beyond that that’s really helpful for for investing. And I think that’s one of the key tenets of what we try to do with our multi-asset portfolios is, you know, stand back from the noise and perspective is the best thing that you can have as an investor.

CS: And I guess the sort of future facing models and the idea of them, the focus on those mega trends, I mean, they don’t really change regardless of the macro either, the short term noise really.

SN: It doesn’t affect it, they don’t tend to change month by month, but you know, they can evolve through time and of course valuations can discount the future growth. And so we’re always very, very aware of that. But you’re right, they don’t change month by month, quarter by quarter really.

CS: And just last before we finish in terms of inflation, do you look at companies that perhaps could inflation prove the portfolio to any degree or is that something you don’t really look at in too much detail for all the portfolio?

SN: Yeah, inflation has been an issue and you know, even within the bond part of the portfolio, we do own some index linked bonds in the US and the UK. I think from an inflation point of view, if you are investing in companies that have got that pricing power that we spoke about, and the ability to pass on any increasing costs to some extent their profits should be should be insulated from inflation obviously, depending on where it’s direct linkages would come through from, you know, perhaps some of the utilities that we own and those regulated utilities that got those direct inflation pass throughs. But that’s not been an emphasis for us over the course of the last you know, 12 to 18 months as those companies have got a lot of investment to make and a lot of capital that they need to deploy into the ground. And so I think from an inflation point of view, it is investing in the right kind of equities that you know, will help the portfolio.

CS: And I just one quick question. In terms of the portfolio itself, would you say it’s quite as balanced as balanced could be, dare I say, in terms of how the portfolio is structured at the moment,

SN: As balanced, as balanced could be? I’m not sure how to answer…

CS: I mean in over the lifetime of you running the fund. Would you say it’s been more aggressively, more defensively positioned, how would you put it on that sort of scale right now?

SN: Yeah, I think you are right there. So I would think we’re probably in the middle of the range in terms of our allocation to equities. And you know, we’re probably slightly higher as we’ve mentioned in terms of the bond allocations and the cash weighting is a reasonable weight within the portfolio. Again, as you mentioned, you’re getting a a reasonable rate on cash at the moment. And so yeah, it, you are right, it is kind of mid-range I think in terms of where we’ve been certainly over the course of the last seven years when I’ve been running the portfolio.

CS: On that one, I’ll leave it there. Thank you very much for joining us today.

SN: Thank you very much.

SW: The BNY Mellon Multi-Asset Balanced fund aims to achieve a balance between income and capital growth over a minimum of five years by investing in equities and bonds. The fund uses themes to target the forces driving global change in markets. To learn more about the BNY Mellon Multi-Asset Balanced fund visit fundcalibre.com – and don’t forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.