Schroders’ Marcus Brookes is looking to quadruple the European equities exposure in the £930m Schroder MM Diversity fund, having cut the portfolio’s European holdings last year.
In 2016 Brookes – who co-manages the multi-manager range with Robin McDonald – took the view Donald Trump’s presidency could negatively impact the valuations of European equities, but now he says they are “more optimistic on the length of the cycle”.
“We were overweight in Europe for a while, then we pared back but we might increase our position again,” Brookes says. “We were concerned about Trump’s protectionism impinging on European companies’ profitability, but we have become more relaxed. Earnings upgrades have come through and the market is more concerned about the politics now. The risk is priced in.”
Invesco Perpetual European Equity, a 1.5 per cent position, is the Diversity fund’s only holding in a European fund. Historically, the Diversity fund has held around 6 per cent in dedicated European funds, and Brookes says they “could get there over the course of 2017”. He adds: “There is a nice value bias to Invesco Perpetual European Equity. We are looking to put it in across our portfolios. It is a core holding.”
Emerging markets is another area Brookes is looking to add to this year. Currently BlackRock Gold & General is used as an emerging markets proxy in the Diversity fund. But Marcus says: “I can see us adding a dedicated emerging markets fund this year”. In other portfolios, Brookes holds Artemis Global Emerging Markets. “It has good managers and is a fund we like. It has the right value bias,” he says.
“Emerging markets have underperformed for five years. Having looked expensive, they were rating at a premium to developed equity markets. We feel that emerging markets tend to outperform once they reach a premium rating.
“They hit a decent discount on price to book at the end of 2015. A lot of bad news is priced in. We have added emerging markets exposure to our higher risk strategies but we haven’t made the leap in Diversity yet.”
The Diversity fund has “very limited exposure” to US equities, which Brookes
says are on “Rolls-Royce prices”. The fund does not invest in a dedicated US equities mandate, having sold out of the Findlay Park American fund at the end of 2015.
“We are in watch and wait mode,” Brookes says. “US equities have risen since Trump was elected: mid and small caps are up 25 per cent. Trump may do well for businesses in terms of reducing tax rates. He may persuade excess cash from overseas to return to the US; his election seems business friendly. But a lot is already priced in. US equities looked expensive a year ago and hope has driven them higher.
“This year will show what Trump can do. But the proposed interest rate tax cuts look to benefit wealthy. That is not the place to cut – they will save it. I’m a little concerned his policy mix needs refining.”
Brookes is also light on fixed income, with JPM Income Opportunity Plus – a 10 per cent position – the only exposure.
Over one year the Diversity fund has returned 10.3 per cent against the 14.8 per cent IA Mixed Investment Shares 20%-60% sector average, FE data shows.
“In relative terms our return for the year as a whole looks slightly muted, particularly against a peer group where we are structurally underweight equity,” Broo-kes says.
“However, we remain ahead of our benchmark, UK CPI, and target UK CPI +4 per cent. Outperforming these in a low volatile manner over the medium term remains our overriding goal, which we are pleased to have achieved over this time frame.”
Marcus Brookes is manager of the Schroder MM Diversity fund