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Fund manager series

Greater emphasis on equities as focus shifts to growth

Developed markets may offer opportunities as global growth, inflation take centre stage

Mr Talib Sheikh, a portfolio manager for multi-asset solutions at JPMorgan Asset Management, discusses the outlook for fixed income and the overall market, in the latest in our series featuring fund managers and market experts.

Mr Sheikh manages the JPMorgan Global Income Fund, among others. The fund aims to provide regular income (monthly or quarterly) by investing globally across a variety of asset classes, including high-yield bonds and high-dividend-yielding equities, real estate investment trusts (Reits), investment-grade corporate bonds and emerging market debt.

Launched in 2008, the JPMorgan Global Income Fund A (div) - EUR had generated an annualised return of 8.6 per cent as of March 31.

Launched in 2013, the A (mth) - SGD (hedged) class delivered a 3.9 per cent annualised return as of March 31. The historical annualised dividend yield for the A (mth) - SGD (hedged) share class was above 5 per cent last year.

Q What is your strategy against a backdrop of rising interest rates?

A With market sentiment firmly focused on broadening global growth and inflation, we are becoming more positive about equity, with a preference for developed markets over emerging markets.


In terms of portfolio mix, Mr Talib Sheikh aims for a diversified blend of securities that can offer reliable income, rather than simply picking those with the highest yield. He feels political risks will be a key factor this year. ST PHOTO: KEVIN LIM

Within the high-yield range, which are higher coupon paying bonds with a lower credit rating than investment-grade corporate bonds, we believe the current yield on offer remains a strong income opportunity in the current environment, even after taking into account the higher risks associated with such assets. We are maintaining our opportunistic allocations to preferred equity, which has a higher claim on assets and earnings than common stock, and non-agency mortgages issued by private financial institutions or other entities not guaranteed by the government.

Q How is your approach to investing for income different?

A We are finding opportunities globally to address the income challenge. We have access to both traditional, well-known asset classes, such as equity income and bonds, and areas that many investors might find hard to access. We look for a diversified mix of securities that can offer reliable income, rather than simply picking those with the highest yield.

FURTHER STIMULUS EXPECTED

The political surprises of 2016 have given governments a clear mandate to reflate or stimulate growth in their economies and address inequality. Investors expect significant fiscal stimulus and a continued move away from the reliance on monetary policy to reinvigorate economies.

'' MR TALIB SHEIKH

The key to generating a sustainable income stream isn't simply to pursue the highest-yielding investments in the absence of considering risk and volatility. It's combining the most attractive risk-adjusted income sources into a global multi-asset income portfolio that pursues the returns that investors need through diversification.

Our investment universe spans a diversified opportunity set of global bonds and equities, Reits and other asset classes on an opportunistic basis, which enables the portfolio to be broadly diversified by both sector and geography. We research new opportunities and strategies that can be incorporated into the fund as conditions change.

Q Does the fund look at benchmarks for its performance?

A The primary focus of the strategy is to provide an optimum risk-adjusted yield with a risk profile similar to that of the benchmark. Thus, we have no performance objective against the benchmark, but we use it as a means of measuring risk and to give an indication of the types of asset classes that we would expect to invest in.

In addition, our asset allocation is not driven in a benchmark-relative fashion. We aim to deliver a risk-return profile similar to that of a traditional 60:40 equity-to-fixed income balanced portfolio, but achieve this with a significantly higher yield component and diversification.

Q Is it more challenging now to find diversified sources of income, given how quickly the global political and economic landscape is changing?

A We have entered an era of rate normalisation. United States President Donald Trump's victory has raised expectations of fiscal stimulus and stronger American growth. With the risk of deflation receding, the lows of bond yields are behind us.

However, we do not expect rates to reach pre-crisis levels, and income will remain a key factor for investors and a major component of total returns for many portfolios for the foreseeable future.

Q Are all income-paying assets going to suffer in an environment where interest rates go up?

A The structural drivers of low yields remain - depressed productivity, anaemic growth in the labour force and demographics. It is therefore unlikely that there will be a significant uplift in yields over the short to medium term. However, rates will see some upward pressure as a result of policy in the US and signs of inflation globally.

There is often the misconception that a rising rate environment can be negative for all income-paying asset classes. Actually, this environment can present a range of opportunities for income investors who have the ability to take a multi-asset and dynamic approach.

Historically, interest rate rises have not derailed equities as long as the increases came off a low base. An improving growth outlook should benefit corporate earnings and equity markets. In this environment, good-quality, dividend-paying equities look attractive. We have also significantly increased our exposure to financials, which look attractive on a valuation basis.

While it is perfectly plausible that we have now entered a difficult period for bond investors as yields rise, the scale of the potential increase is key, as is flexibility. US high-yield instruments continue to look attractive, and we expect most issuers to maintain reasonable fundamentals. Alternative credit such as non-agency mortgages and preferred equity look attractive as they trade with minimal duration and currently pay an attractive yield.

Q What does the "Trump trade" mean for income investors?

A Mr Trump's election victory has suggested that his pro-growth business policies (less regulation, tax reform and higher fiscal spending) would significantly boost economic activity and finally spur inflation, not only in the US but globally as well.

The political surprises of 2016 have given governments a clear mandate to reflate or stimulate growth in their economies and address inequality. Investors expect significant fiscal stimulus and a continued move away from the reliance on monetary policy to reinvigorate economies.

Rising growth and reflation reinforce our positive view of stocks versus bonds. The correlation of equity and bond returns is likely to be less negative as nominal growth, which is not adjusted for inflation, accelerates and - this is key - central banks react to the change.

Q What will be the biggest political surprise of 2017, and does it matter for multi-asset investors?

A Political risks remain centre stage this year, with pivotal elections looming in the Netherlands, France and Germany. In the US, there remains policy uncertainty out of the White House.

In terms of the portfolio, we have recently undertaken a meaningful tilt towards a reflationary environment of slightly higher growth and therefore more pro-risk. We are not making dramatic changes in strategy; it remains to be seen how political change will play out, but we could see more optimism around cyclical assets.

In a broadly positive growth environment, we would reasonably expect stocks in general to outperform, so we are increasing our allocation to global and European equities at the margin.

In Europe, we see a broad pickup in economic momentum, which in turn provides a lift for stocks. However, this is not necessarily evenly spread and, just as momentum in the euro zone is rising, we face a rollover in economics indicators in Britain as political and economic risks have yet to be discounted.

A version of this article appeared in the print edition of The Sunday Times on April 30, 2017, with the headline ' Greater emphasis on equities as focus shifts to growth'. Print Edition | Subscribe