Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by David Jane, Manager of the Miton Cautious Multi Asset Fund.
Hello, David.
David Jane: Good morning, Emma.
Wall: So, we've just heard today that inflation has risen to 0.6%, not as high as we've seen it in the last decade and still some way off the government's target of 2%. But if you strip out oil and you look at core, it's a bit higher than that and indeed, it's an increase from the last month. And with rates so low, 0.25% at the moment, inflation is a problem for investors. How does that affect how you run multi-asset?
Jane: It's been our thesis for perhaps eight years now that inflation will be much lower than it has been in that longer-term history for much longer than investors think and even with 0.6% we're still at the extreme low end of inflation. But as multi-asset investors we're outcome driven, we must allow for all potential future scenarios around inflation.
Although we would broadly say it's going to stay much lower, not get back to that target or even those much higher rates that we can remember from history, we have to allow for the possibility it might come in much higher than our expectations. So within our portfolio we'll own a broad base of low inflation beneficiaries. But at the other side, we're going to own gold to hedge against that rise in inflation.
Wall: Because Norway has got an inflation of 4%-plus at the moment. I think a lot of people are concerned with the oil price beginning to drop out of that deflationary pressure that we could see inflation go in that direction and as I said, with rates so low, it means getting a real rate of return, a real rate of income is increasingly difficult.
Jane: Indeed. And then broadly the commodity deflation period over the last three or four years probably has come to an end now and broadly we're seeing commodity prices in this region as opposed to halving or doubling as we've seen over the last four or five years.
So they are not going to be a deflationary effect. Clearly, they are not necessarily going to be an inflationary effect either. But the challenge investors have, as you especially say, particularly on the income side of investing is, how do you find assets that might earn above even these very low rates of inflation.
Wall: And I suppose with such a broad spectrum of tools at your disposal with multi-asset, you say, for the inflationary quandary you can use gold as a hedge and indeed, you can have assets that benefit from a low inflationary environment. What then would you say the other big risks to returns at the moment?
Jane: Well, clearly, with extreme low rates the risk is that we're all broadly (rolling) on that broad lower for longer scenario and the inflation comes in very strongly, rates go up broadly across the world. That's one risk. The other risk that you could focus on is, are the prices of all assets driven up by the QE, the government intervention and therefore, do central banks lose credibility? If you buy the first argument that the price of all other assets is inflated artificially by government intervention over and beyond fixed income markets and the credibility fails, there is a risk of a broad-based sell-off in assets classes.
I think you can challenge both those theses actually. I don't necessarily think the valuation of equities is broadly outside long-term bounds notwithstanding the intervention by policymakers. The main distortions appear to be in fixed income.
Wall: And how do you tackle that then as a multi-asset investor? Is it about going bottom-up and finding quality individual investments that perhaps will benefit regardless of the macro backdrop or is it very much about playing those micro themes?
Jane: In our strategy it has to be both. We have to have a broadly well-diversified portfolio with assets and asset classes that are independent of the intervention, so we can diversify globally. Clearly, the U.S. is no longer embarking on QE. Clearly, the emerging markets never have. So, those areas, you could say, are broadly immunized from that feature. But again, as you say, you can go micro and thematic and you can say, these asset classes are set to grow anyway.
Nice little example might be consumers in emerging markets. There are more of them. They have more income. Or perhaps, the change in our energy infrastructure, the new energy economy. That will be growing anyway irrespective of QE and broadly irrespective of the short-term macro environment.
Wall: David, thank you very much.
Jane: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
