Equities Have Further Upside, Not Over-Extended, Says Berry Asset Management

Tom Burroughes

2 May 2013

UK equities are not in over-extended territory after a recent strong performance and this is one of the reasons why Berry Asset Management is maintaining a “full commitment” to stocks as its portfolio mandates permit, its chief investment officer says.

After a period when inflation-adjusted returns on UK equities as recently as a year ago were an anaemic 1.2 per cent, in annualised real terms (source: Barclays Capital Equity Gilt Study), longer-term stock market returns appear more promising, with the same 10-year figure returning to its long-term average of around 5 per cent.

“Equities could rally further, which is one of the reasons we are maintaining as full a commitment to stock markets as the mandates for our range of portfolio strategies will allow,” Mark Robinson said in a note.

(Berry Asset Management has been shortlisted to receive an award at tonight’s WealthBriefing Awards 2013 event, held in London.)

As far as fixed interest assets are concerned, Berry Asset Management said it has, in considering its second-quarter asset allocation models, reconsidered its allocation. Robinson argues that it is unrealistic to expect bond markets to deliver equity-like returns in the long run.

“The great rotation out of bonds is one of the next big challenges for the markets to absorb; this may not unfold in 2013, particularly if the QE taps remain open, but we are definitely closer to the end of this great period for bond markets than the start and the need to invest in something else is growing. The big conundrum for wealth managers is finding the something else that hasn’t already exceeded its longer term average return,” said Robinson.

Assuming that the catalyst for rising bond yields (and a fall in capital values) would be expectations for higher future inflation, Berry considers that real assets such as equities and property could fare “reasonably well” during the next phase of the economic and market cycle, the note said.

Such a shift, said Robinson, could prompt a major re-think on asset allocation on the part of some of the largest institutional investors. The average UK defined benefit pension scheme, for example, has reduced its equity commitment from around 60 per cent to 40 per cent since 2006, whereas its allocation to bonds has increased from under 30 per cent to almost 45 per cent (Source: The Purple Book, PPF/The Pensions Regulator).

A significant realignment may therefore be on the cards, and this could prolong the equity market rally still further. However, assuming investors’ appetite for riskier assets is already sated, other options for what should be the lower-risk component of their portfolios remain scarce, Berry Asset Management said.

Commercial property

Berry Asset Management said it believes commercial property could well see a renaissance.

“Whilst an increased allocation to commercial property is possible, so too is an enhanced commitment to alternative investment funds, which can iron out stock or bond market volatility. These funds could have been relative bystanders during the strong equity and bond market rally of recent years, but their steady absolute return characteristics may come more to the fore in the months ahead,” said Robinson.

“We are also hopeful that strategic bond funds, where we have a strong commitment, will utilise the full powers of their flexible approach to navigate in a tougher environment for bond markets; inflation-linked bonds should also continue to offer some protection. But if the tide does begin to turn more aggressively, then we are prepared to make a greater tactical shift in asset allocation,” he said.

Track record

Berry Asset Management’s model balanced strategy has a 14-year track record; it always operates with an equity quotient of between 40 per cent and 60 per cent, and has delivered a cumulative return of 131.8 per cent over a ten year period to 31 March 2013, and 106.9 per cent since inception in March 1999. This compares with respective returns of 122.8 per cent and 80 per cent for the IMA Mixed Investment 40-85 per cent Shares sector (formerly IMA Balanced).

Looking at broader economic trends and the eurozone’s debt plight, Robinson said the current monetary stimulus and ultra-low interest rate environment is likely to remain in place for an extended period, and that this will continue to be highly supportive for stock markets, despite a weak economic backdrop in many areas.

“The chaos Cyprus unleashed on the eurozone’s financial system served as a stark reminder of how quickly things can change, but we feel that it is still, on balance, probably more dangerous to be out of markets at present than in them, and that any setbacks that we do see are likely to be short-lived given the huge levels of institutional and private investor cash needing to find a better home,” he said.

Berry Asset Management is a majority owned subsidiary of Bordier & Cie, a Geneva-based global private banking group, established in 1844, overseeing a total of £7 billion of client assets, as at 31 March.