While markets are unlikely to repeat last year’s “smooth ride”, the team behind JP Morgan Global Macro Opportunities warns that the cost of getting out of markets too early could be as high as getting out too late.
Shrenick Shah – co-manager of the £955.5m absolute return fund alongside James Elliot and Talib Sheikh – said there are still some attractive investment opportunities available.
He explained: “When you think of the level of drawdown that risk markets had last year, it was very low.
“So, the S&P [500], when you take the total return including dividends, didn’t have a down month last year. That just shows how much of a smooth ride the markets had last year.”
Performance of S&P 500 in 2017
Source: FE Analytics
Shah said: “We aren’t expecting anywhere near the same ease of path for us and for markets, but that’s not a problem.
“We make a very strong assessment of where we stand, taking risk into account, and the portfolio is going to reflect it.”
He added: “The cost of getting out of the market too early could be as high as getting out too late so we are, supported by a constructive view, taking quite a lot of risk.”
Shah said the team expects stronger US growth led by higher consumer spending, a pick-up in business investment and tax reforms.
“The US is growing above trend and we think the tax reform is going to impact slightly sooner,” said Shah. “We have a Fed that has continuously been articulating that they prefer to be slightly behind the curve than pre-emptive. That is a nice setup for the US cyclically.”
Europe and Japan are experiencing similar growth, benefiting from a pick-up in the global economy and external demand.
The portfolio manager said the team is also more bullish about the prospects for China and emerging markets, having previously been more bearish about the latter sector.
“The reason for our turn [in views] is that we are at the start of the business cycle in the emerging markets, so there is some nice runway to go to have some kind of catch-up growth,” he explained.
“In China, with the consolidation of president Xi [Jinping], we expect policy to be more focused and more potent in the direction of boosting economic growth.”
Discussing positioning for 2018, Shah highlighted widespread technology adoption as one of the themes being played in the portfolio.
He said: “The crucial element of widespread technology adoption is that we are seeing an accelerated pace of adoption of technologies and innovation. Our objective is to tap into this and try to monetise it for our investors.”
“We are looking at artificial intelligence [AI] as a key technology. Not so much how it is impacting profit lines today, but the infrastructure that needs to be built into the global economy to fully enhance the opportunities that AI promotes. We are trying to invest along those lines.”
He also noted that as the team doesn’t expect a big pick-up in productivity it has taken a strong view on technology as a key contributor to higher levels of economic growth.
The portfolio manager said the team was also bullish about the prospects for miners – highlighting groups such as BHP Billiton, Rio Tinto and Glencore – that are likely to be beneficiaries of stronger emerging markets, higher commodity prices and more robust global growth.
Shah said the team has maintained its short position in so-called bond proxies, which have been boosted by investors’ search for yield in recent years.
“We are short bond proxies: consumer staples and US utilities,” he explained. “These are relatively expensive sectors which have a negative correlation to high yield, so we expect to generate alpha in our central case.”
The team also believe that cyclical assets will likely outperform reinforcing its position on bond proxies, which will likely struggle.
“We have a strong preference for economic and financial cyclicality and a strong dislike for carry,” the manager noted.
The JPM Global Macro Opportunities fund aims to deliver positive investment returns over a rolling three-year period in all market conditions, investing across a range of asset classes.
Over three years, the fund has delivered a total return of 30.17 per cent compared with a 7.61 per cent return for the sector, as the below chart shows.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The team takes a thematic approach towards investing, whereby a number of macro themes are identified with the managers determining the best investment strategies to capitalise on them.
Current key themes being played within the portfolio include China in transition, the maturing US cycle and widespread technology adoption. As such, top regional exposures include North America, Asia ex Japan and Japan.
The fund comes highly recommended by the Adviser Fund Index (AFI) panel of leading financial advisers and, as such, is also featured on FE Invest’s Approved List of funds.
“Although the fund has a riskier approach than its absolute return peers (cash plus 7 per cent), we believe the team has the capacity to reach it,” FE Invest analysts noted.
“The process has proved its robustness over very different investment environments. There is a strong focus on risk management as JP Morgan is one of the leading experts in this field, and we believe investors benefit from advanced risk management strategies.”
JPM Global Macro Opportunities has an ongoing charges figure (OCF) of 0.78 per cent and yields 1.03 per cent.