Q&A with Martin Gray Lead fund manager at Midas Capital International
Given the bearish market conditions, what would be your advice for investors in their approach towards their asset allocation strategies?
A key point is that market conditions change and therefore static or single strategy portfolios over the longer term will not always work as effectively as an actively managed multi-asset portfolio. Portfolios must be well diversified, not geographically or scientifically, but pragmatically across all asset classes and be created by an experienced team with the ability to change weightings as circumstances dictate.
The important factor is to ensure that portfolios are actively managed by professionals with good credentials and a proven track record of managing money in various market conditions.
At Midas Capital International, we like to begin the process with a core asset allocation and then add value around the edges. The starting point is cash, and then look at what will provide a better return and evaluate the risk versus return. Our funds have no benchmark weightings at all. We look at what is happening in the whole global economy and build macro positions. This includes inflation data, exports, currency, property markets etc. We have a genuinely active management style where portfolios are monitored daily and adjusted in accordance with market conditions, opportunities still exist and the ability to create a true multi asset portfolio during these turbulent times is the key to assisting investors.
How would you allocate the mix of equities vs bonds and other asset classes (and what sort of time frame for such an allocation strategy)? Our investment approach is generally to limit the downside as much as possible bearing in mind the risk objective of each portfolio and consequently at the moment and for the foreseeable future our key requirement is to limit volatility. The management style of Midas funds is always to hold assets for the medium to long term and not to make short-term tactical plays as market timing in the current conditions is not the optimal way to make gains for investors or to try to limit losses. Currently there are a number of buying opportunities across asset classes and we are likely to pick up blue chip stocks that have longevity and those stocks which are likely to outperform during recessionary periods. Consumer staples and tobacco companies will continue to deliver returns when other sectors struggle during a down cycle. A history of managing money over various market conditions is the key to investing currently as with our portfolios. Our lower risk portfolio delivered a positive return of 7.5% during the years 2000-2003 when the majority of balance portfolios lost over 15%.
How about allocation region- or market-wise?
The outlook for the Asian region over the medium to longer term is extremely positive, although the outlook in the shorter term is concerning. Price subsidies for food and energy, as well as currency intervention and controls are creating false demand and runaway inflation, building up to the proverbial 'recipe for disaster'. Those governments with the political strength to reverse this situation will be the countries to back in due course.
Which markets would you consider overweighting and underweighting?
Currently we believe the main areas to overweight would be fixed interests and cash. That doesn't imply investors leave their money in the bank but used it as part of an actively managed portfolio where the manager utilises currency instruments to generate higher returns while reducing the overall volatility of the portfolio and be ready for buying opportunities as they present themselves. We would equally recommend being underweight equities, commercial property and commodities.
How about commodities as an asset class for the long-term investor (though there has been declines recently on the commodities front?
Commodities are an important part of any well-diversified multi-asset portfolio. The key is as with any holding that they are closely monitored and don't add undue risk. The opportunities to add value are considerable, but it's a case of being selective and actively managing the holdings. Knowing when to sell an asset is as important as knowing when to buy.
In terms of equities, what would you view as defensive stocks/ sectors or pockets of resilience in such bearish & volatile times? What sort of strategies would you advise?
There are a number of sectors that perform well during downturns and can be negatively correlated to other sectors. Typically companies such as electric companies, food/supermarkets, tobacco, often lower end shops and retailers selling consumer staples. Equally blue chip stocks where you are certain there aren’t at risks can continue to perform well as they are often the first to recover once the markets do. So, it is advisable to buy low and hold in anticipation of recovery to capture all the potential upside.
There was a recent segment on CNN when a Wall Street broker said she looks forward to scoop up shares in other banking stocks saying that it's the cheapest for as long as she can remember, is this a wise strategy (or is this a case of catching more falling knives)? It would really depend upon her risk profile and time horizon for investing. There are certainly bargains to be had, whether financials are a good bet in the short term seems unlikely. There is more bad news to come and we anticipate further problems for banks, further hedge fund closures as liquidity pressures increase and credit to support trading no longer exist.
Further corporate failures are expected along with rising unemployment and greater strain on consumers. The catalyst for change would be an unwinding of the leverage in the financial system and recovery from excesses in previous years. The housing market needs to stabilse and personal savings need to increase so real improvements in the economy are unlikely till 2010/11. Once recovery comes there is no reason to suppose that the more secure financial stocks won't rebound well as on previous occasions. It's just a question of how cheap you are buying them and how long you are prepared to wait for the gains.
Some investors may have the same rationale as the broker above when you consider the PE valuation for many Asian stocks. Would you recommend bottom fishing for these stocks/sectors as a long-term buy-and-hold strategy?
Yes, absolutely we believe that there is merit in buying cheap and holdings assets for long- term gains. The key is to ensure that the investment is robust and is not likely to disappear whilst waiting for recovery. Good companies with solid credentials will prove to be good investments in this type of strategy. It's currently important in a portfolio to be building positions in stocks/sectors with the greatest visibility, stability and certainty of earnings
What hedging activities or instruments (ETFs for example?) would you suggest for such bearish market conditions? How about structured products?
Structured products/ETFs and alternative assets are important in multi-asset portfolios. There are a number of structured products coming to the market based on indices and offering attractive returns with time horizons as short as a year. These can provide exposure with relatively little risk as long as the overall structure is viable. There are a number of large cap ETFs around at present, and some of these look like good investments.
Some of the volatility in Asian markets had been attributed to redemptions for example by hedge funds. How long do you think such outflows stemming from de-leveraging last?
We expect further problems for hedge funds and more of them to disappear from the market, there needs to be consolidation in the industry. The larger, well-run and credible hedge funds and managers will survive the situation whilst others disappear. The lack of liquidity and constraints on dealing will mean that hedge funds are likely to have to operate in a completely new environment from that experienced in the last few years of excesses and it will be those who can adapt that will survive. How long the issues prevail for though is difficult to predict currently.
What would you see as signs of the markets bottoming out?
The credit crisis is unfolding much more slowly than originally expected. This is in large part down to the intervention of central banks, the US Fed and national governments. Their huge financial support packages can only delay but not prevent asset price deflation and credit contraction. This in turn will translate into lower economic investment and significantly slower world GDP growth, if not outright recession.
Would this bearish climate spell opportunities for distressed assets in the West (as in the US and Europe). And what areas would these be (perhaps real estate, hotels, infrastructure for example)?
The shrinkage in savings rates in the UK and US in particular is not just down to consumer profligacy, it is also down to falling 'real' household incomes, for those below the professional classes. This shortfall has been met by credit cards and borrowing against the family home. As credit availability shrinks, consumer spending is being cut, the impact of which goes way beyond the household, into the global economy and will not be a short-term phenomenon and can spread to a number of economies.
Is inflation as much of a concern as it was a few months ago?
At last, there has been some recent acknowledgement that emerging market 'de-coupling' may be more myth than reality. So much has been written over the past 12 months suggesting that the BRIC (Brazil, India, China) and most emerging economies could avoid the slowdown of the West. Inflation is proving to be the deadly key to start unwinding the massive outperformance, but a world economic downturn will lead to lower demand for goods and therefore lower commodity demand. There have already been some setbacks in emerging market equities (and their currencies) but if commodity prices do fall more sharply, this may prove to only be the beginning
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Given the bearish market conditions, what would be your advice for investors in their approach towards their asset allocation strategies?
