Asset allocation: Thesis’ Hoggarth bets on Europe despite Greek fears

Thesis Asset Management’s Matt Hoggarth is keeping his focus on Europe despite the potential “domino effect” that many feared in the market during the peak of the Greek crisis.

The senior investment analyst, who leads the stock selection process within Thesis, has recently doubled the European equity exposure of one of his mandates to 4.5 per cent, believing Europe is on the right track to recovery.

He says: “In mid-June the markets were coming away from the peak they reached in April as a result of the uncertainty of the outcome of the situation in Greece.

“But with quantitative easing still ongoing and the very strong rhetoric from Mario Draghi, we felt there was a strong underpinning for European equities. It was also reassuring to see how little contagion there was between the peripheral states of the eurozone compared to 2012.

“Everybody was concerned about a domino effect but we have progress in the peripheral countries so we felt much happier to add to Europe.”

Thesis’ Mandate 6 portfolio, which currently has £146m invested, is one of seven in the manager’s model portfolio range, with Mandate 1 being the lowest risk and Mandate 7 the highest.

Among the other changes in the fund since the start of the year, Hoggarth has reduced UK equities by 3 per cent, but this remains the biggest exposure in the Mandate 6 portfolio at 37 per cent. “The UK is still an area that we like partly as a result of our in-house stock selection,” he says, but also because the UK market has a large number of multi-national companies, meaning it offers good worldwide exposure.

Thesis Asset Allocation

“We particularly like the FTSE 250, so half of our portfolio exposure to the UK has been in mid-cap stocks.”

In the past few months, Hoggarth also “comfortably” added a 3.75 per cent passive small cap exposure to the fund through the Vanguard Global Small Cap Index fund as small caps offer more reasonable valuations, as well as greater potential for earnings growth, than large caps.

He says: “Small caps are able to deliver better results potentially than large caps as it is easier for smaller companies to grow compared to large companies by the equivalent percentage. Also you’ve got potential innovators or new disrupter technology coming through from small companies so that high rate of growth is certainly attractive.”

Hoggarth is also bullish on Japanese companies as a result of the recent “corporate governance revolution” from the Japanese government, which has seen companies becoming much more “shareholder-friendly”.

In the Mandate 6 fund he holds, among others, GLG Japan Core Alpha, covering large caps, and JOHCM Japan, which is exposed to small caps. Both holdings combined make just under 3 per cent of the portfolio.

“We added over 3.75 per cent to our Japan exposure, currently at 7.75 per cent, as a result of the success of Abenomics and the commitment from the Bank of Japan to expand the money supply and drive inflation. We are very pleased to the see the corporate governance revolution that is going on in Japan with the trend to a much more shareholder-friendly policy on companies.”

As for the US market, where the fund has a 13.3 per cent allocation, Hoggarth has some regrets about not having increased this exposure further in the past.

He says: “The US market is always a tricky one. You always feel you are paying a premium valuation to buy into the US relative to other markets and so that is why we’ve been underweight but on the other hand the resilience of the US economy and consumer often justify that prem-ium valuation.

“It is an area we possibly regret we haven’t had more exposure.”

While Hoggarth remains positive on developed markets, his outlook on emerging markets in the short- term is less rosy.

Emerging market exposure in the Mandate 6 fund has recently been reduced from 8.75 per cent to 6 per cent as Hoggarth waits for “growth to come through”.

He concludes: “We remain bullish on emerging markets for a long-term view, growth has to come through. In the short-term we remain concerned as the US dollar strengthening will impact emerging market exporters and financials although we don’t have a massive exposure to China.”