Despite Europe’s unpopularity among investors, concern over the exchange implications of further quantitative easing is discouraging advisers from reducing exposure to the region.
The Aggressive index offers Adviser Fund Index (AFI) panellists the greatest opportunity to express their sentiment towards global markets.
In the May rebalancing panellists reduced exposure to Europe as sovereign debt fears persisted and the potential of macroeconomic concerns to filter down to a corporate level scared off some investors.
Overall, however, changes to the portfolio were relatively modest considering some of the apparent concern over whether the global recovery can be sustained. For some, the general gloom was a sign to stick with their convictions.
“I was pretty happy with where we were positioned going into the May rebalancing,” says Sam Owen, a portfolio manager at Beckett Financial Services and an AFI panellist. “I didn’t alter our European exposure as we get it through the Neptune European Opportunities fund, where we have confidence in the manager’s ability to outperform.” (AFI continues below)
Over the past three years the Neptune fund, managed by Rob Burnett, is up 4.55% in sterling terms against an average loss of 4.72% in the Investment Management Association Europe excluding UK sector.
Owen’s sentiment is shared by Juliet Schooling, the head of research at Chelsea Financial Services, who says the poor outlook for Europe betrays a more general trend of scepticism towards the Continent. “We didn’t change anything on Europe last time,” she says. “From an investor’s point of view it tends to be an unloved area but it’s a much broader market than that suggests. I think the gloom tends to be overplayed as there are still opportunities.”
That panellists have not abandoned the region completely can be partly explained by the perceived need for currency diversification in a portfolio as much as a bullish forecast for European equity markets. While the euro was driven down against other leading currencies during the fallout from the Greek sovereign debt crisis, more recently concerns over the possible impact of further quantitative easing (QE) in America have reignited exchange rate fears.
Some of these appear well founded. According to Financial Express the yen has strengthened by 12.84% over the past 12 months against the greenback, dropping to ¥80.41 a dollar, its lowest point since April 1995. The shift appears to suggest growing market conviction that QE2, a second round of quantitative easing, will prove a drag on the dollar.
Schooling says: “Currency does worry me but we’ve got a reasonably well-rounded portfolio in terms of diversification so we have tried to avoid over-exposure to a single currency. You have some managers fleeing the dollar while others appear to be buying into it, which is a sure sign that there is confusion in the market over the current trajectory.”
This has helped to highlight the appeal of global funds. Although Schooling says she tries to avoid these types of products as it can be difficult to reflect sentiment towards particular regions, the diversification benefit of exposure to different markets and currencies has increased their perceived value.
But volatility can also produce opportunity and Owen says she has been finding ways to reflect currency views within her more aggressive portfolios. “There are currency strategies that we would like to play in the more aggressive mandates,” she says. “These would include looking at the appreciation of emerging market currencies.”
Of course, Japan in and of itself continues to present problems for panellists. There appears to be a general consensus that current equity prices represent significant historical value, but after a prolonged period of failing to realise this value, many investors are simply losing patience.
Those who have kept faith are faced with a picture of sluggish economic growth, unpredictable exchange rate shifts and an increasingly uncertain political climate. This is combined with poor long-term demographics and the perception that Japan is over-reliant on its export sector.
“We’ve lost a bit of faith with Japan,” Owen says, “so we’ll look to reduce our exposure there at the next rebalancing. It’s still one of the largest economies in the world, however, so I couldn’t be comfortable removing it completely.”
Pessimism over Japan’s prospects has become consensus to such an extent that contrarians have been licking their lips over a potentially forgotten gem. For them the debate over when the country might drag itself out of its slump is still alive and those who capitulate now may simply be crystallising their losses.
“I feel strongly that there’s value in Japan,” says Schooling. “But what we need to see is people start to buy it. It can be a frustrating market but we are not likely to change our exposure to the country at the next rebalancing.”
The investment environment in which AFI panellists have had to make their rebalancing decisions still presents challenges. Those who thought the past six months would help paint a clearer picture of the direction of markets will have been sorely disappointed.
Perhaps then, a sensible philosophy in the present climate is that suggested by Mark Harris, the head of multi-manager at Henderson. “What your job is as an investor is to find areas where you can gain clarity and back it,” he says.
“Where you can’t achieve it, perhaps the best thing to do is just leave it alone.”