Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Tom Becket, head of Global Investment Strategy at PSigma Investment Management.
In my career, markets have never been tougher than they are now. For the first time, I'm struggling to put together near-term predictions on the likely direction of financial markets. I can find compelling reasons to love and loathe every single asset class.
If pushed, I'd say equity and commodity markets generally have probably gone far enough for now and that some consolidation, or even a pull-back, is likely over the summer months. But this is not a high-conviction call, and there are still areas and themes I find attractive for the longer term, such as Asia, water and healthcare.
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Just now it's vital to focus on the things you're convinced are going to grow or become more valuable over time, so I am still a fan of the following funds that give exposure to these themes: First State Asia Pacific Leaders (020-7332 6500); Pictet Water (00 352 467 1711), and Polar Capital Healthcare Opportunities (020-7227 2700).
There is a chance that economies have bottomed and are starting to grow. Indeed, here at PSigma, we do not expect markets to re-test their lows in this current equity cycle. It might even be some way north of here before the markets do correct; this could be the start of the new bull market.
Given the overriding uncertainty, I suggest having a neutral weighting in equities and being balanced between growth and value opportunities. I believe investors should not have underweight equity stances or be overly invested in defensive stocks, as we have moved from a world where owning equities was the big risk to one where not owning equities is the big risk.
The new 'risk assets' to which I am adding fresh money include equity long/short funds, including the excellent Blackrock Absolute Alpha Fund (020-7743 3000). The fund normally invests with a near-market neutral stance. This means it should be less volatile than a typical UK equity fund and hopefully be able to generate positive performance in any conditions. The fund should also allow some participation if markets continue to rise, while protecting your portfolio if markets start to struggle again.
I am also buying funds that can benefit from the volatility and dislocation in financial markets, including Legal & General's DART Fund (020-3124 3583). This fund invests across a range of different asset classes, seeking to exploit market inefficiencies. In 2008, markets fell so hard, and correlations between asset classes surged so extensively, that many investors believed that modern portfolio theory (which advocates diversifying your assets) had been disproved.
I don't think this is the case. Rather, I stand by my view that the use of alternative investments within portfolios can reduce risk and enhance returns over the long term. And I believe this fund has the potential to perform differently to the other components in our portfolios, hopefully helping to cut overall portfolio volatility.
I am increasingly concerned about the long-term outlook for government bond markets, but can see further improvement in corporate credit markets. However, given the historical relationship between rising bond yields and corporate yields, I am recommending funds that have the ability to hedge out the government risk. In essence, we're taking a view that there will be a long-term improvement in corporate credit markets, while not having to worry that any improvement in bond prices is negated by a rise in interest rates. The SWIP Credit Advantage Fund (0131-655 8500) is my latest addition to our buy list and fits the bill perfectly.
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