With Valentine’s day just around the corner, and much talk of over-exuberance and bubbles bursting, we asked four fund managers which areas of the market they have fallen out of love with and which remain attractive.
“Markets were hot on February 14th last year. But it was about as good as it got for risky assets pre-COVID. And what followed was arguably the most spectacular dumping ever seen, as the disease was transmitted globally, and investors sought protection in the only thing they could – cash, and the very safest bonds.
“Thankfully, central banks did what central banks do, loosening monetary policy to such an extent that the S&P 500 had hit new highs just six months later. Investors in risky assets are always smitten when central banks are easing. But the opposite is also true – investors should be fearful when central banks give the cold shoulder.
“And that, we fear, is what is slowly starting to happen. We’ve found that what tends to drive risky asset prices is the 12-month change in global central bank asset purchases - in other words, what really matters is whether authorities are easing more than before, or less. The Fed’s support is wilting given its balance sheet is no bigger now than last summer. There’s stealth tapering going on, and a growing risk of heartbreak.
“A year on from Valentine’s Day 2020, many risky asset prices are once again around all-time highs, and risk premia not far off record lows. We have substantially de-risked our portfolios as a result. That’s not to say we don’t find anything attractive though – we still have a crush on emerging market currencies and emerging market local currency government bonds, where valuations remain historically cheap.”
“One investment that’s caught my eye is RMDL lending. It’s a specialist trust on a 6% discount which is yielding around 8%. What's really interesting about this one is it is making the CBILs loans on behalf of the UK government - that's the coronavirus business interruption loans. The government guarantees 80% of your principal and 100% of the first year’s interest. And then typically the interest rate on these lines is around 9%. So, I think the risk reward is skewed very much in its favor.”
“Then there are some areas that I think would be an expensive date at the moment. There’s a lot of frothiness around in the market, for example in the electric vehicle sector. It’s now worth $1.2 trillion versus around $600 billion - the amount of traditional car companies - and valuation metrics are extremely stretched. We have a 23 times enterprise value to sales multiple for the electric vehicle companies, versus only 0.6 times for traditional, so that market's looking very stretched.”
“I think the best opportunity given the current circumstances and for the next five or 10 years is medical technology, because the one thing we've learned from COVID, if not before, is that governments are going to have to save money and become more efficient in the provision of healthcare. So companies that can help with that efficiency, through superior technology to allow surgeons to see more patients more quickly, that's the sweet spot. So med tech will be an increasingly important part of the portfolio.
“On the other hand, and at the risk of really upsetting my children, I think social media is definitely an area that people will want to avoid. I think we've had peak social media. As has happened with Donald, for example, I do think that the Facebooks, the Twitters and all of these other companies are going to come under threat from regulation from people wanting their privacy back and people more concerned about their digital footprints.
“That doesn’t mean all will lose out, but I think it's going to be an area of great scrutiny. And these companies are not tech companies. In many cases, they're media companies, reliant on advertising, et cetera. I think their whole business models will come under scrutiny and that's a good thing. And there's going be a lot of disruption.”
“One of the areas that I'm probably most interested in at the moment is an area that has been out of love for quite some time. And that is value - specifically those funds that have more of a value tilt. So an area that I'm particularly keen on is UK equity income. And you can extend that into Asian income as well. I think that value is going to make a come back over the next 12 months.
“But an area that I'm struggling to understand is bonds. Because, quite frankly, when you think about what the investors in our funds want, they generally want us to make them money over a reasonable timeframe, beat inflation, and cover the cost of advice. And if I look at the poultry returns that are being offered from government bond markets, they don't cover inflation and they don't cover the cost of advice. And if you hold them to redemption, they're going to lose your money.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the managers and do not constitute financial advice or a recommendation to buy to sell.