Talking to Fund Calibre, James Mee, co-head of multi-asset strategies and manager of the Waverton Multi-Asset Income fund, dives into the current economic landscape, exploring the likelihood of a recession and the factors influencing global markets.
Giving an update on fund positioning and allocation across equities, fixed income, and alternative investments. The interview concludes discussing the role of cash in the current environment and the impact of de-globalisation on investment decisions.
Why you should listen to the interview: As co-head of multi-asset strategies at Waverton, James is uniquely positioned to speak to the benefits of a multi-asset strategy in today’s climate. He reflects on markets in 2023 but also gives an update on current fund positioning and where they see markets potentially going in 2024. And importantly, what this means for investors.
Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, tune in to the ‘Investing on the go’ podcast. This interview was recorded on 17 January 2024.
What’s interesting in this interview:
Recession: possible or probable?
“Firstly, it’s important to distinguish between the US and the rest of the world. In the US, I think we’re probably unlikely to see a recession over the next 12 months. Famous last words, but let’s see!
“We’re coming out of a manufacturing recession in the US which is generally under-reported. The US consumer remains resilient; they’re certainly less rate sensitive than we are in the UK. They’ve termed out their debts, their mortgages are fixed for 30 years. Balance sheets are solid, nominal wage growth is still positive and we have positive real wages, so I think the US consumer is still fairly well supported today. I don’t expect government spending to come down materially in the US in an election year. So I think the US is unlikely to see a recession, unless anything materially changes.
“In the UK and Europe, I think we’re probably in recession now or certainly in very low or anaemic growth. We’re much more rate sensitive over this side of the pond, less so than we were in previous cycles. We have fixed mortgages for longer terms and around 1.4 million mortgages will be rolling off their fixed terms over the next 12 months in the UK, so, we’re more rate sensitive in general. Inflation’s higher in the UK, and early reports of Christmas spending that we’re seeing from companies have been pretty mixed. We feel the UK consumer is in a weaker position to his US counterpart.
“It’s not necessarily the fact that we go into recession, it’s more about how severe that recession is. And if we were to go into recession, either in the US or elsewhere, central banks have significantly more firepower today, with roughly 5% rates that they can cut, which is more than they had going into Covid. And from a markets perspective, a lot of markets outside of the US are not expensive and they’re pricing a lot of this downside in already. For example, if you look at the UK, it’s 10-11 times earnings, Europe’s at 13 times earnings, so to some extent it’s already reflected in the markets.”
Allocating to fixed income in 2024
“Fixed income was a real driver of performance in Q4 for sure. The long duration stance that we took and maintained throughout the year – and we took it in various different ways, with different currencies ie. dollar, sterling, and options as well – it all really came good in Q4.
“The way we see it and the way we think about our fixed income allocation in a multi-asset portfolio is, it’s there to protect capital – certainly how we’re allocated at the moment with longer duration. Our duration today is about nine years. So, for a percentage point move in the yield, you get a 9% – 10% point increase in the price.
“The way we see it today is if we think over this side in the UK and in Europe, if we see a recession, which you would expect to be consumer demand destructive, we would expect inflation to come down, we would expect yields to come down. And so a longer duration stance in the gilts part of the market where we’re allocated would favour the fund.
“If we see inflation higher, then short-term rates are higher, longer-term inflation expectations actually come down and, over time, yields come down and while rates stay higher for longer, you’re also more likely to lead into a recession, which as I say is consumer demand destructive. So, on any reasonable time horizon for a position like this one to three years, I think long duration remains suitable.”
Diversifying with real assets
“We have roughly 20% allocation to real assets. By that I mean in property, infrastructure, specialist lending, asset finance commodities, that’s how we segment it. If you put it all together, we call it real assets, it’s been a very tough two years.
“Last year on aggregate, we actually finished up and the positions that we own finished up, and we’ve been talking about value that we see in the space for at least two years now. We do our own work: we model the underlying, we go and meet management, meet the board, go on site visits etc. We undertake proper fundamental research to understand what we own and to build the net asset value from first principles – it was very encouraging last year then to see some of the value that we see in the businesses and we see in the net asset values actually crystallise.
“For example, Industrials REIT was a name that we owned and it was our real winner last year. It was acquired at a 44% – 45% premium to the share price on the day that it was announced, on a small premium to the NAV in June. And we think it highlights the value on offer that lies just off the beaten track within that traditional commercial property space, like the retail space which is still facing headwinds, and the office space more recently, which is also facing headwinds. We also think that it highlights the importance of doing the work from the bottom up and really understanding what you own.
“In terms of what we own today that we’re excited about, it has to be PRS REIT. They provide newly-built family homes for the private rental market in the UK. They’ve got a portfolio of 5,000 homes and have a 97% occupancy rate, which is extremely high. Rent collection is 99% and compares very favourably to other parts of the property sector. And because of the demand for the product, they’re actually able to raise rents 5% – 10% per annum, depending whether you are an existing customer or whether you are a new customer, notwithstanding a cost of living crisis.
“And actually that’s something we were talking about 18 months ago or so, that the quality of tenants has been improving because the demand for the product has been rising because we have been in times of tighter budgets, and yet the shares trade at just under a 30% discount to the company’s quoted NAV. Even if you take a haircut on that NAV, you’ve still got a 20% upside just from the discount narrowing. And on top of that, we’re expecting to receive dividends and some NAV growth over time.”
Conclusion: Multi-asset funds offer genuine diversification by strategically investing in various asset classes, and in this interview James Mee explains how the team at Waverton invests to capitalise on this freedom to invest across the sectors — including why cash remains an important asset class for investors to consider in a portfolio today.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The fund manager’s views are his own and do not constitute financial advice.
Main image: alice-yamamura-iAVTikZXqR0-unsplash
