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 Freddie Lait, Manager of the Latitude Horizon Fund.
Hi, Freddie.
Freddie Lait: Hello.
Wall: So, firstly, happy one-year anniversary of the launch of the fund.
Lait: Thank you.
Wall: The way that the market looks right now is same, same and different than it did a year ago. Where are you seeing the greatest opportunities now and how does that differ to a year ago?
Lait: Yeah. Well, what's happened is, broadly, even a year ago everyone was saying the markets are very expensive and we were all getting slightly nervous about where they were going to go. And I think when we spoke a year ago, I said, expected returns would be quite low and expected volatility should probably be quite high.
Now, in one sense, we've seen that. But in another, we've been surprised in both ways that actually the markets carried on grinding upwards double-digits in most regions, which makes it incrementally more expensive, and volatility at an index level has been very low.
But that said, the opportunities that are coming up for us mostly are because at a stock level the volatility has been incredibly high. And so, many of our stocks are moving up or down 30%, 40%. You see lots of great stocks moving down 20% on earnings, et cetera. So, I think, there are lots of – the volatility at the single stock level does give you opportunity in the value sectors in particular.
Wall: And is that why you have, well, quite a sizable holding in cash? You've got 20% in cash at the moment. Is that because just you're sitting in the sidelines and waiting for those opportunities?
Lait: Yeah. So, I think, now is the time not to take a large amount of risk. I'm still a big believer that good stocks and good companies will continue to compound wealth for us as shareholders and for my clients for the next 5 to 10 years. But I do think that when you run an unleveraged fund, having the cash tactically to be able to buy and take advantage of the underlying volatility is incredibly important and gives the portfolio a nice bit of velocity if we ever do get a pullback.
Wall: And are you expecting that pullback?
Lait: I am in a broad sense, but sort of broadly have been for a year or two as well. I think it wouldn't surprise anybody if the markets fell 10% to 15%. That said, calling the timing of one of those is impossible in my view. And so, we always say – we've still got 45% invested in equities. And I believe the market can carry on going at a very low level for a very long time.
Again, I think, it's very key to say we have a short list of stocks that we'd like to buy, and those stocks have been falling and rising more rapidly than the market itself. So, while we may or may not have the underlying index pullback, we see the opportunities the stocks we are looking at.
Wall: And do you think when that pullback comes, it is going to be developed markets? Or are we going to have another situation like we did with the Global Financial Crisis where actually it's across the board valuations do slump?
Lait: So, valuations are very high broadly everywhere. And America went first and then Europe caught up and now the emerging markets this year have had a phenomenal run. I think if you saw more than, say, a 10% pullback, which most people would say would be healthy, you definitely expect things to start to re-correlate and this decoupling idea would prove false again like it did in 2007 and like it has in broadly every other crisis.
Markets are expensive. If bond yields rise or growth stalls or inflation comes back, or political unrest grows or any of the other things we worry about happen, I think all markets could fall together. And critically this time, not just stock markets but bond markets, too.
For the last 15 years, bonds and equities have been very decorrelated and that has caused the sort of balanced portfolio to do phenomenally well for the last 15 years. I think next time that might be a real danger when people lose money on both their growth of their portfolio in their stocks as well as their defensive side in their bonds and people need to be much more careful about portfolio construction.
Wall: And presumably, that's why you hold assets such as gold, which are less correlated with equities and bonds?
Lait: Exactly right. So, the things that we have instead on our sort of more diversified side of the portfolio is invested in gold and then some gold-linked emerging market currencies and other emerging market currencies as well, which we see as benefiting from a weaker dollar, a slowdown in central global growth and also possibly benefiting from that strength in the emerging markets that we've been talking about on catchup basis to the other parts of the world.
Wall: Freddie, thank you very much.
Lait: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
