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By Holly Cook | 07-01-2013 12:01 AM

Fund Manager Favourites: 3 Asset Classes for Today's Market

Barings' Andrew Cole explains why he likes UK, US and Japan equities, as well as short-duration bonds, but is steering clear of emerging markets equities and debt

Holly Cook: On Fund Manager Favourites we normally hear from a fund manager about their three favourite stock picks but today we're going to take a slightly broader focus. Joining me is Andrew Cole, he is manager of the Baring Multi Asset Fund and we're going to talk about some assets.

 

Andrew, thanks very much for joining me.

 

Andrew Cole: Thank you for inviting me.

 

Cook: So as manager of the Baring Multi Asset Fund, why don't we just start by you tell me a little bit about the strategy, what is it you're looking for?

 

Cole: Well, we're looking to be in the best assets and the right assets, at the right time. We’re a growth strategy, we're normally a sort of equity replacement that’s seeking equity-like returns, but without all of the volatility that’s associated with being in equities. We want to do that by firstly, being in the right assets at the right time and then secondly, thinking about good portfolio diversification.

 

Cook: Okay. So, in your three asset classes that you're highlighting for us today, we're going to start off with why you like equities; then we'll move into a little bit more detail of which areas of equities you like; and then, finally, we're going to talk about debt and credit. So, let's start with number one, equities, why do you prefer that asset?

 

Cole: Well, we do think the global economy is slowly and steadily improving and even the chairman of the Federal Reserve over the last two weeks has been talking about the risks to the downside in the economy are slowly abating. We would agree with that, and in an environment where interest rates are likely, but surely steadily to rise, we favour equities over bonds. We do see a healthy corporate sector, an environment where earnings are set to continue to improve.

 

Cook: So, what would be the associated risk then with equities as an assets class?

 

Cole: Well, the risk from owning equities here is firstly, that we get a much weaker outcome in the major economies, or I suppose alternatively that the balance sheet strengths and corporate profits get raided by the government sector as they look to replenish their deficits, but that looks pretty difficult from here.

 

Cook: So, let's go into a little bit more detail then, so within equities which areas do you like?

 

Cole: Well, we favour those areas where we're getting something of a modest growth surprise, and for us that is in Japan, it's in the UK and in the United States. Now, in two of those areas, namely the UK and Japan, we have some currency weakness that is helping to stimulate profits, i.e. overseas earnings are being boosted by a weak exchange rate, and that's very much the case in Japan and here in the UK. In America, it is the notion that the US consumer is feeling the benefit of a slowly improving housing market, jobs, banks are lending and we're seeing a broadening out of the US economy that we want to have exposure to that US consumer.

 

Cook: So, amongst those three--UK, US and Japan--are any of them sort of slightly more risky in your view?

 

Cole: Well, the Japan one I suppose comes with more risk and more volatility and we've certainly witnessed some of that over the last month or so, and it's because Japan is having a go at this dramatic change of course, under what is referred to as Abenomics under that new leadership. And we've got an election ahead in July, and we're looking for further strengths and gains to the LDP, so that there are reform initiatives to follow what up until this point have been monetary and other stimuluses to the economy. So, near term we need to see that broaden out and I suppose that's the riskiest one here and now; elsewhere, as I say, it's much more to the extent to which the economy might surprise to the downside.

 

Cook: Okay. So, we've looked at equities there in fairly good detail. Let's move on to your final and third piece, the debt/credit story.

 

Cole: Well, as I said earlier, we do see an environment where bond yields steadily increase over time and I mean, we have seen ten-year bond yields here in the UK and in the United States rise by 1% in recent weeks. And there might be a tactical opportunity there. But more strategically we do like lending to companies that have strong balance sheets but inclined to keep cash and either borrow or actually lease their equipment. So, we quite like owning capital equipment whether it be things like airplanes, containers and leasing those to companies.

 

So, secured lending. It tends to be short maturity, so you get to set your interest rate every three months, you're not subject to that long run rising interest rate environment that we see ahead as determined by government bonds. We prefer lending to what continue to be quite secure corporates.

 

Cook: Okay. So, we've gone through the three assets that you like, let me just throw in one extra question, is there any asset class that you'd particularly want to avoid?

 

Cole: I mean, for the moment, we remain very cautious about those areas where -- which have seen a lot of flows in recent years. Now, they are repricing rapidly as we speak but things like emerging market credit, some parts of the high yield bond space, investment grade bonds. Some look like a crowded room with a very small door for the moment and we're seeing a lot of weakness in those areas.

 

We've been underweight those areas and it may be that we get presented with opportunities two or three months from now. But for the moment, we're wary where -- particularly it would seem Asian investors, where they tend to be fast and they all rush in and at the moment they seem to be all rushing out and we're not inclined at the moment to stand in their way.

 

Cook: Excellent, well Andrew Cole from Barings, thank you very much for your time today.

 

Cole: Pleasure. Thank you.

 

Cook: From Morningstar, I am Holly Cook. Thank you for watching.

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