The first decade of the new millennium has been characterised by dire returns for equity investors, with developed markets underperforming government bonds and barely making money on an absolute basis. However, a number of investors including Tom Walker, manager of the Martin Currie Portfolio investment trust, believe there will be a turnaround in the new decade.
"I do not expect a raging bull market," says Mr Walker, "but it will be a good place for savers to be. Ten year gilt yields have continued to come down since 1991 aided by benign inflation, but going ahead investors should be much more cautious. It is inevitable that yields will rise."
Although this means gilts would offer a more attractive interest rate their capital value would fall, which is not good for existing holders.
Mr Walker also prefers investments which offer a real return in an inflationary environment, an increasingly likely possibility thanks to government quantitative easing programmes. However, he believes there is enough deflation to keep inflation low for the time being, due to factors such as unemployment and low-cost manufacturing from China.
Mr Walker adds: "Most western governments are concerned with deflation so interest rates will also stay low."
While the trust largely uses a bottom-up stock picking approach for its goal of long-term capital growth, a top down view is sometimes taken. Mr Walker is very cautious on the UK economy which relies heavily on its financial sector - relative to other countries, and he does not expect the fortunes of banks to improve for some time.
That said, the largest holding in the trust at the end of November was HSBC which has strong Asian interests, although in general Mr Walker has been avoiding financials and this bank was the only one he held through the credit crisis. A few months ago he added a small holding in US investment bank JPMorgan, which is among the better capitalised banks, and its business is less focused on lending than some of its peers.
He is concerned about the level of household debt but does not expect a double dip recession.
Despite this, he continues to look for investments among FTSE All-Share companies, given that more than two thirds of All Share earnings are from overseas. UK-listed companies still account for the core of the portfolio - nearly 58 per cent at the end of November - and all of the top 10 holdings.
Mr Walker says he has looked to companies with an overseas focus for a long-time, favouring emerging market exposure, although UK equities always account for at least 50 per cent of the portfolio.
Recent additions to the portfolio include FTSE 100 satellite technology company Inmarsat which services the maritime industry and has good growth prospects. FTSE 250 car dealer Inchcape, meanwhile, has overseas operations in countries including Hong Kong, Singapore and Australia, and its share price represented very good value although Mr Walker does not expect huge top-line growth.
The trust's portfolio is focused on 50 to 60 holdings. Mr Walker says: "A way to outperform is to run a focused portfolio as it can make it sufficiently different to the trust’s benchmark, the FTSE All-Share."
Differentiation from the benchmark is also achieved through holdings in overseas stocks and a long-term commitment to private equity via UK quoted investment companies, giving what Martin Currie describes as a three-tiered portfolio. But Mr Walker adds: "The portfolio is increasingly two tier because the distinction between UK and overseas holdings is blurred."
An area in which the trust has overseas holdings is technology stocks, as there are relatively few listed in the UK. "There has been a lack of investment in technology since the bust in these stocks at the turn of the millennium," says Mr Walker. "I now expect strong demand growth and more capital expenditure in this area."
This is the largest sector allocation in his North American Alpha fund, nearly 24 per cent of assets as of the end of November, with names such as Apple Computer, IBM and Hewlett Packard featuring in the top 10 holdings. Information technology is also the largest allocation in his North American Alpha fund accounting for more than fifth of the assets.
| Tom Walker CV |
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Tom Walker is a director at Martin Currie Investment Management, and in addition to the Portfolio investment trust runs the North American and North American Alpha funds. He joined Martin Currie to lead the Pacific Basin team in 1996, and has headed up the North America team since 1998. Prior to joining Martin Currie, he worked for Baring Asset Management in Hong Kong. Before that he spent six years with Edinburgh Fund Managers. Mr Walker boasts 21 years investment experience. |
The private equity component, which has varied between 6 and 18 per cent of the portfolio, was a very positive contributor until 2008, says Mr Walker. One of the reasons Martin Currie Portfolio’s net asset value (NAV) total return failed to beat the FTSE All Share during 2008 was because of the declines in the share prices and NAVs of private equity investment companies.
But Martin Currie Portfolio has done better over three and five years with NAV returns of 2 per cent and 53 per cent, against -6 and 37 per cent for the FTSE All Share, and in line with its sector average.
The share prices of private equity investment companies have done much better over the past few months though NAVs tend to lag share prices both on the way up and the way down, so the former have yet to improve. Consequently, the allocation to private equity has been kept at the low end of the range because of these problems - at just over 8 per cent of assets as of 30 November - almost all of which is in F&C Private Equity trust. But Mr Walker is now looking to increase exposure to this asset which is currently very cheap, while investments made in 2009 and 2010 are expected to do well in the long-term.
