Asset allocation: Kames’ Jamieson bullish despite market uncertainties

Neither the looming threat of tighter monetary policy nor the plethora of other uncertainties clouding markets right now are overly concerning Kames head of multi-asset investing Scott Jamieson.

In fact the manager believes the future is looking very bright. “I have never been more bullish in regards to financial assets than I have been in recent years and I remain that way,” says Jamieson.

“The ultra low interest rates that we see in the world today will generally be around this level in five year’s time. I just cannot see the conditions under which cash interest rates normalise to 4 to 5 per cent. The response to even marginal rises could be quite significant and markets are just not positioned for that.”

Pointing to the loose fiscal policy in Japan and Europe, he says: “There is a polarisation in monetary policy, the like of which markets have not seen for a decade.”

Alongside Colin Dryburgh, Jamieson manages the £295m Kames Diversified Growth fund. Launched in July 2010, the portfolio’s goal is to outperform the UK Retail Prices Index by at least 4 per cent a year over the medium term. Since its launch in June, the fund has delivered 42 per cent, just surpassing the 40 per cent return from its yardstick.

The traditional multi-asset portfolio currently houses around 146 holdings. Right now the split is 21 per cent in bonds, 43 per cent equities with 26 per cent dedicated to alternatives, including renewable and real estate investment trusts. The 10 per cent balance is in cash.

“We are very traditional in our approach in that we buy things that we like. We are not trying to arbitrage ‘A’ versus ‘B’,” says Jamieson.

From an equity perspective, the loose monetary backdrop characterising both Europe and Japan has made them favoured plays but so too is the UK. Jamieson says: “In Japan, we strongly favour companies that are best placed to benefit from the Abenomics revolution. We are fairly well spread across sectors but the play is very company specific, such as those firms which are exhibiting an improvement in corporate governance.”

Kames table

One such example cited by the manager is Dai-Ichi Life Insurance, one of Japan’s biggest insurers and a top five holding. “It represents that type of qualities in a company which we are looking for,” he adds.

Elsewhere across Europe, the focus is very much “on recovery potential”. Key plays for the managers include the likes of Belgian postal service group Bpost and French multi-national auto-giant Renault.

Despite being a growth fund, with the aim of maximising total returns,Jamieson says he and his co-manager are “very yield focused”. Imperial Tobacco, a group – and its sector – known for its dividend payouts is presently the manager’s top equity holding. This is complemented by an investment in US tobacco group Reynolds American.

He says: “In the UK, the focus is on income but that is a theme globally too. It is about resilience of the dividend programmes.”

Notably, prior to May’s general election Jamieson cut back his allocation to the UK on the back of fears of market turmoil being caused by any political surprises. However, like the rest of the population, the result caught the Kames team by surprise. “We thought the market would be more volatile. Like the pollsters we misjudged the situation,” he says.

Jamieson has since re-topped up his allocation. “In the UK we like companies where the income stream is strong – insurance companies, such as Direct Line, where cash is rolling in and yields are high,” he adds.

However while overall the duo are well exposed to equities but underweight bonds Scott fears if the US procrastinates over rate hikes, there is a real risk the UK could become the “safe haven” of choice.

He says: “This in turn would see assets rise but it ultimately could be destructive. Sterling could move reasonably sharply, which would not be great for certain industry sectors. But overall the UK looks a good deal better than many other areas.

“While there is the prospect of higher interest rates hanging over the US market, the economic data coming through has been far from scintillating. In addition, the strength of the US dollar has taken the shine off some US earnings.”

In regards to the fixed income universe, while the typical market view is that bonds are set to be engulfed in further turmoil Scott says that ultimately “it depends on where you are invested”. He has cut back his fixed income holdings since the start of the year but admits he would look to increase this position if a suitable “tactical play” came on the horizon.

He says: “If the US Federal Reserve hikes rates in September it would create a window of opportunity to extend duration. But the opportunity to buy bonds will not be long-lived.”