Emma Wall: Hello, and welcome to Morningstar. I am Emma Wall and here with me today is Justin Onuekwusi, manager of the Multi Asset Funds for Legal & General to give me three investment tips. Hi, Justin.
Justin Onuekwusi: Hi.
Wall: So, first up you've got an investment opportunity for us today, haven't you?
Onuekwusi: Yes. So, in terms of the opportunities across the world in terms of the universe of assets that I can invest in, there is one asset class which stands head and shoulders above the rest from a risk/return perspective. That's U.K. direct property.
The funds we manage are typically index funds; however, we can go active if it's an asset class which is particularly attractive for our funds. U.K. property is one of those asset classes. It doesn't lend itself to passive management. It has to be really managed actively.
So, why are we positive on U.K. property? Well, firstly, we became positive on U.K. property in early 2013. Why? We saw increased income, increased income growth in the both primary properties but also secondary properties. Importantly as well, we also saw a pickup in transactions, both inside London but most importantly outside London. So, the growth for secondary and properties outside of London gave us the confidence that this property recovery was widespread. Now, property tends to perform well into a recovery and we are very much in that expansion phase at the moment.
Last but not least, property yields are decent amount for the risk that you take. So, if you look at the IPD Index, you're talking about 4.6% yield and in this low yielding world that is particularly attractive.
Wall: I think investors often confuse commercial property with residential property. There is so much in news about residential property, government initiatives, rising house bubble, are we in a bubble, are we out of bubble? But you are talking about commercial property here, aren't you?
Onuekwusi: Yes, definitely talking about commercial property. And if you look compared to 2006 where we are in terms of value now, outside of London we are still 65% of the levels we were in 2006. And inside London we are kind of 90% of those levels. So, there is still for us a lot of legs, so to speak, in this property recovery.
Wall: And what's your second opportunity today?
Onuekwusi: Second opportunity is emerging markets. And it's been quite a contrarian position when we first launched the funds over a year ago. However, it started to become more consensus now. Emerging markets, what's so good about them? Firstly, they've got flexibility over both fiscal and monetary policy. Emerging markets didn't borrow as much in the good times. They don't have the debt accumulation that you see in developed markets, number one.
Secondly, they've got flexibility over monetary policy. If there is a global shock, which we are not expecting; but if there is a global shock, emerging markets still have the flexibility to use conventional monetary policy, so to reduce rates. Developed markets, if you look across developed markets…
Wall: They have nowhere left to go.
Onuekwusi: Exactly. Rates are on the floor. So, there is not really much they can do in terms of conventional monetary policy. In addition, you got better demographics in emerging markets, increasing labour force, increasing middle class. They typically don't have the same pension issues that you have in the developed world.
Last but not least, emerging markets from a valuation perspective now are looking quite attractive relative to developed markets. Since 2011 emerging market equities have actually gone sideways whilst developed markets equities have done very well. So, from a valuation perspective now emerging markets are starting to look more attractive as well.
Wall: And your third investment tip today is actually a risk, isn't it, it's a warning?
Onuekwusi: Yeah. So, I've been talking about it for a very long time about the gilt dilemma. So, typically cautious and defensive investors have held a large allocation to gilts. Given where yields are we think you're going to see volatility in particularly the gilt market but also in other bond markets. So, I think it's really important to diversify your safety assets across different geographies.
We've learned that since 2008 even safe government bonds can get downgraded. The U.S., the engine room of the world, has been downgraded. France has been downgraded. The U.K. has been downgraded. So, even safe government bonds have been downgraded. So, it's really important to diversify those safety assets.
The second thing is, you have to be active in terms of asset allocation to take advantage of this volatility and not just active in asset allocation, in traditional bond holdings, but not just hold guilds, not just hold corporate bonds, but hold emerging market debt, high-yield, global credit, short-duration bonds and really use the full flexibility of the full fixed income toolkit.
Wall: They sound like more risky options within the bond market though. Is that correct?
Onuekwusi: Some of those are, I'd say return-seeking within the bond portfolio, but also some of them are kind of safe assets. Short-duration corporate bonds, for examples, as you start to move into lift off in terms of interest rates, they will provide protection in your bond portfolio.
Wall: I suppose it's taking like an equities approach to bond investing?
Onuekwusi: I would say it's more just using the full flexibility of the fixed income toolkit.
Wall: Justin, thank you very much.
Onuekwusi: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
