The biggest threats and opportunities for investors today
After a two-year hiatus, FundCalibre hosted one of its popular ‘speed-dating’ events this week –...
At this time of year, it’s easy to try and pigeon-hole markets, economies, and timing into convenient points that appear on a calendar. And we are all guilty of doing so – with our outlooks for markets every January.
But, as James Davies, investment director for the managed funds team behind Close Managed Income, points out – in reality there are many moving parts to the financial system, each working to its own chronology and having a greater or lesser effect on other factors.
Here, James gives the team’s view on markets currently and details where they are finding opportunities – with a focus on dividend growth and smaller companies:
“When we talk about how we’re positioned within Close Managed Income for the next three months, it’s probably more useful to consider the broader narrative of how we’ve been seeing the world over a longer timeframe, and indeed our investment philosophy when it comes to managing an income strategy,” he said.
“That we’re multi-asset investors and therefore aim to be diversified across different asset classes and geographic regions, is central to our investment approach but worth reiterating, particularly in relation the fact that we are able to have exposure to lots of different areas of the market, some of which will be doing better or worse than others.
“The requirement to generate an income does present some challenges (as well as opportunities) to how we manage the portfolio – not least because an investment generally needs to pay us a distribution. In simple terms, however, the degree to which we flex Close Managed Income between a growing income and a high absolute level is a key determiner of our positioning at any given point in time.”
“Essentially, over the past 18 months or so we have been adding more to the ‘dividend growth’ areas of the equity market, and indeed increased equities as a whole, and have been reducing the credit portion of the portfolio,” said James.
“We have achieved this by switching some of our fund managers who were paying a higher level of dividend to ones with more of a dividend growth strategy. For example, in Europe and Asia we bought the LF Montanaro European Income and the Matthews Asia ex-Japan Dividend funds respectively. Both of these strategies also have the advantage of being more exposed to smaller and mid-cap stocks, which coming out of the pandemic we perceive to be a good place to be as economies re-open and growth begins to recover.
“Our view is there is an opportunity within equity income more broadly since the ‘dividend reset’ of the coronavirus pandemic, where many companies either ceased or curtailed their dividends, and used the period to reinstate distributions at a more sustainable level.
“This is important because if you view dividends as a return of capital to shareholders, the proportion paid out represents a choice by company management about use of capital; capital that could be used in other areas of the business, like paying down debt or investing for future growth. In an environment where inflation may or may not be higher than it has been over the last decade (more on this in a moment), dividends represent a more immediate return of capital, as opposed to a ‘longer duration’ return of capital growth in the future.
“That said, our desire to have a bit more of Close Managed Income in dividend growth orientated funds reflects us wanting to have exposure to a dividend distribution that is more able to maintain its real value in a more inflationary environment.”
“In terms of our view on inflation it is worth saying that we aim to be macro-aware as opposed to having macroeconomic views explicitly drive our asset allocation,” continued James.
“Clearly, the supply chain disruption arising from the pandemic has created cost pressures and bubbles in demand, which added to the extraordinary monetary and fiscal measures enacted by governments and central banks, has led to some strong inflation numbers across most economies.
“We see inflation continuing to be a theme throughout the first half of 2022 at least and so favour equity income strategies over credit and fixed income. We have also switched half of our modest exposure to gold into a broad commodity tracker – a decision which was additive to performance during 2021 and which we are happy to maintain.
“Elsewhere, within alternative assets we have added a bit to infrastructure and like the exposure we have, which has more underlying inflation protection than before, and provides some exposure to renewable energy.
“A new position we brought in has been Pantheon Infrastructure, which we added to at its Initial Public Offering (IPO). It is a defensively exposed portfolio of infrastructure assets that the management team believe are high quality and offer inflation protection and exposure to digital infrastructure, power and utilities, renewables, transport, and social infrastructure.
“Overall, we have positioned Close Managed Income so that it can benefit from a more inflationary environment, whilst also having exposure to dividend growth and small cap areas of the market. The slight overweight allocation to equities and infrastructure at the expense of fixed income reflects not only our sense of the inflationary outlook, but also tight valuations within bonds and minimal yield cushions should interest rates rise.”