“We believe equity markets continue to look attractive relative to other asset classes, especially in key regions including the UK, Japan and Emerging Markets“, Man Group’s multi-asset managers Ben Funnell and Teun Draaisma have said.
The duo, who launched the group’s Man Dynamic Allocation (DNA) strategy a year ago, said their asset allocation framework continues to favour equities over bonds in the current environment, despite concerns over the recent slowdown in growth globally.
“The US and global cycle has had three mini-cycle slowdowns since the 08-09 recession, as well as a number of peaks in 2010, 2014 and most recently in September 2018,” Funnell and Draaisma said.
“The magnitude of the current slowdown is similar to the prior two, and on balance, we think we are most likely now approaching the third mini-cycle low in global activity. Usually, that’s when we would typically consider buying equity risk.”
Funnell and Draaisma, who invest the Man Dynamic Allocation fund across equities, bonds and alternative risk premia, said they continue to see a number of clear opportunities for equities.
“We don’t see an imminent recession; earnings revisions are no worse than normal; and there has been some de-risking of portfolios in the summer. We are therefore happy to remain overweight equities, underweight bond duration, and long credit risk. In short, it’s not over til it’s over.”
While there have been ongoing concerns about macro changes and the potential impact on equity markets, the managers believe the leading indicators for growth and inflation in key economies – particularly the US – remain positive for now.
“Inflation remains quiescent, meaning the Fed can be loose, and this has un-inverted the 10-2s yield curve, allowing credit spreads to remain tight,” said the pair.
“Staying with the US, weekly initial unemployment claims are just very slightly off 50-year lows, while our Man DNA leading indicator is also still pointing to a strong recovery in the US purchasing managers’ index over coming quarters, driven by lower input costs for business, the recent rise in government bond yields from low levels, and the outperformance of early cycle vs late cycle stocks.”
In terms of their favoured equity markets, the team believe the US is less attractive than peers now following its run higher, with more appealing valuations elsewhere, although we would still consider it in our portfolio at current levels.
“The strongest buy signals in our proprietary Composite Valuation Indicators are for Japan, the UK and emerging markets equities, with a weaker buy signal for the US equity market. If the global cycle recovers from its mini-cycle trough as we expect, then we should see cyclicality and value rewarded,” Draaisma and Funnell said.
Since launching a year ago, the fund, which sits in the Investment Association Targeted Absolute Return sector and aims to achieve its return target of 3 month GBP LIBOR +4% (gross of fees) over rolling three year periods**, whilst expecting keeping volatility to between 6-8%, has returned 4.9%.
**Whilst the Fund seeks total returns over rolling three year periods in all market conditions, there is no guarantee that this will be achieved over that specific, or any, time period