Asset allocation: Aberdeen’s Harries cuts US equity exposure over valuation fears

Aberdeen multi-manager Mark Harries has cut his exposure to US equities over concerns that the prolonged market rally is starting to look a bit tired.

Harries, who runs Aberdeen’s flagship fund-of-funds vehicle – the Multi-Manager Cautious Managed portfolio – asserts that given the run shares have enjoyed since the nadir of the financial crisis, one of the longest on record, the US especially is looking “very long in the tooth”.

While Harries has been paring back his overall equity exposure in anticipation of some market volatility, he still remains overweight. But with around 8 per cent invested in the US market, the £238.4m fund is now neutral in terms of its bets on the world’s largest economy.

Harries says: “We had been overweight but reduced that back in March. Our concern is valuations in the US, where prices are either at the high end of value or purely expensive.”

The S&P 500 may be up by just shy of 20 per cent over the past 12 months to 16 June but investors got a shock when the US economy shrank 0.7 per cent in the initial three months of 2015, compared to the same period last year, with unseasonal weather again blamed for the first quarter numbers.

“Employment and wage growth are showing clear signals of improvement. But most of our equity managers are expecting that growth will be subdued. According to our own economists, growth will be 2.3 per cent this year and we cannot find anyone forecasting more than 3 per cent,” adds Harries.

There are some concerns that if the US Federal Reserve pursues an aggressive policy on interest rates that could hit the housing market, but given the economic data currently doing the rounds, Harries believes such actions are unlikely.

Following Aberdeen’s 2014 buyout of Scottish Widows Investment Partnership, Harries took the helm of the firm’s multi-manager portfolios alongside Simon Wood in late July last year, both of whom had joined from SWIP.

They work alongside multi-asset manager Graham Duce, who had previously run the funds with Aidan Kearney, until he left following the shake-up on the back of the merger.

The range is benchmarked against the Investment Association’s Mixed Asset 20-60% Shares sector. Since 1 August 2014, just after the new team stepped up, the fund is ahead by four per cent to 16 June, under its peer group average of six per cent for the period, according to FE Analytics. Year-to-date, the gap narrows, however, with the portfolio and sector average up three per cent apiece.

Despite the uncertainty plaguing fixed income markets, Harries and his co-managers need to have a hefty slug of bonds in the fund, given its conservative make-up. Currently the weighting stands at 35 per cent.

But when they took over the reins, Harries says the team introduced “a very diverse set of funds”, including the M&G Global Macro Bond to the fixed income component.


As well as some eight per cent of its assets in the aforementioned M&G fund, the portfolio has a similar level entrusted with the Ariel Bezalel run Jupiter Strategic Bond and Invesco Perpetual’s Global Financial Capital vehicles, which is co-run by Paul Read and Paul Causer.

Harries says: “Corporate bond fund managers are quite positive on financials as firms have been clearly improving their balance sheets, and they believe there is something of a ‘sweet spot’ there right now.”

Harries’ UK equity play, like the US, is neutral. But financials, and notably asset managers, is one of the areas he sees value, in a market he describes as “not cheap”.

Harries says: “Fund managers are pointing to the pension reforms and the need to develop products as people no longer have to buy an annuity. In addition, a number of the UK equity income managers see pharmaceuticals as an interesting area. For example cancer-fighting oncology products are being developed quite rapidly.”

Elsewhere Harries is following the monetary stimulus. “Markets are supported by central bank actions – especially in Europe and Japan. Both quantitative easing programmes are very significant. But there is a valuation argument too.

“While Greece is weighing on peoples’ minds, there are still reasons to be constructive on the European market. We are still positive on Europe as it houses some world-leading companies.”

However, Harries cautions against any over-exuberance given that the market has already witnessed a pull back after a flying start to the year, which initially saw markets in France and Germany soar.

Harries believes too that there is a “real change” taking place in Japan, where he notes across the world’s third largest economy, fund managers have been pointing to a more shareholder-friendly environment.

“But fund managers perhaps might like the process to be moving that little bit faster,” he adds.

“There has been a modest uptick in the economy. Abenomics is in the background. We have had a fairly weak yen, which has been very helpful if you have been hedged. Japan has been outperforming the world index for some six months. It still represents a long-term opportunity.”