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.
Wall: So, we've had a very interesting start to the year, a return of volatility, which perhaps came as a surprise to many, started by occasions in the US, which many have said this means, hang it, get rid of all your US, it's caused all the volatility. But you still have quite a sizeable allocation to it. So, presumably, you are still believing in the fundamentals?
Jane: Absolutely. I mean, the return of volatility is very welcome in fact. Volatility was way too low. The market had got extremely complacent. And particularly, the dominance of certain quantitative strategies, known as short volatility, who were using the options market, which became so fulfilling. So, as these strategies were successful, more money was committed, volatility got lower and lower and lower and that fed through to valuations in the real market.
As inflation returned in people's minds, those strategies stopped working. And you saw a self-fulfilling event which led the market to go down. And now, volatility settles out, what you might suggest is appropriate levels. So, in many ways, you need to sit back and say, well, has that in any way changed the fundamentals, or has there simply been the market sorting itself out? And in my head, the market sorted itself out.
Certain people pursuing irrational strategies lost a lot of money. That's a good thing. And the return of volatility is absolutely very good for fundamental-driven managers because you start to get some dispersion in individual stocks and sectors which is good for us.
So, we then look at the overall situation in the States and we can say, well, the economy remains very strong, earnings growth is very strong, bond yields are rising and that's again a good thing. But if you own the assets that benefit from that environment, it looks extremely attractive to us.
Wall: Well, I suppose, that's the key thing. It's no longer a tide which is raising all boats. It's actually about being a bit more selective about where you are investing within that market.
Jane: Absolutely. So, if you look at the market year-to-date, those things known as bond proxies or defensives, have been very poor. And even in the correction, which typically you would expect defensive or supposedly low-risk stocks, to do better in a correction, they did worse. Because what the market was doing, is saying, we need to readjust to a new environment and that adjustment led to a small fall.
Wall: And I suppose the other thing to mention is, as a multi-asset manager you do have more levers to pull in order to balance some of that risk that you may be taking on in equities. How do you construct a portfolio in that way?
Jane: Well, I think, you need to look at the market very differently to perhaps what worked in the last 10 years. What worked in the last 10 years where you had very slow growth, low and falling bond yields, low and falling inflation was typically companies that could sustain a lot of debt, had stable revenues, weren't cyclical.
Now, we are looking at a different economy, aren't we? We are looking at rising interest rates, rising inflation, relatively strong growth. The sort of stocks you need in that environment are very, very different. So, you need to transition for that. But at the same time, those kinds of stocks perhaps cyclicals, perhaps more volatile stocks, maybe you can own less equity to balance that overall risk because clearly the sort of equities you own are more volatile, emerging markets, cyclicals, resources and so on.
Wall: And now, Trump has been out this week talking about tariffs, talking about a protectionist stance. Presumably, that protects US assets, but has some negative implication for emerging markets. Is that something you are concerned about? Or do you see global opportunities?
Jane: We have to look globally around this. And bear in mind that if you are a Chinese steel producer, the U.S. is a very small market to you.
Your steel goes domestically, it goes in the region, it goes on the one belt one road projects, so on and so forth. And I think the statistic is something like 3% of China's steel production goes to the U.S. So, we are talking about broadly a globally irrelevant story, particularly when he is going to exempt Canada and Mexico which are the big producers who sell steel into the U.S.
But what we really should look at this is much less the emergence of global trade wars which in many ways has been a trend for the last five years actually. We need to bear this in mind. This isn't a Trump story. Worldwide trade barriers have been going up for some time. What we really need to do is look at this as a grandiose statement for the benefit of Trump's electorate which actually signifies very little. I mean, it's very helpful for us because we own US steel producers.
So, in that sense, that's good. But in reality, the broader implications are much less than perhaps the market is thinking. Because I doubt that Trump is foolish enough to embark on a global trade war because that's a negative-sum game for everyone. Why wouldn't you want to import cheap subsidised steel – get other people's taxpayers to subsidise your steel imports? That makes sense to me.
Wall: David, thank you very much.
Jane: It's absolute pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
