Rathbones’ Coombs builds cash ‘to take advantage of a correction’

Writes Sam Shaw...

Rathbones’ multi-asset portfolio managers have been building up cash and ‘safe haven’ assets as head of the team David Coombs warned “things are getting pricey”.

Coombs and his assistant manager Will McIntosh-Whyte said they had moved their portfolios’ cash position higher through selling government bonds, given their low-to-negative real yields and the instability being witnessed across the Western political stage.

In addition, portfolios are also buffered with other ‘safe haven’ assets, having built positions in Swiss francs, gold and other diversifiers.

Coombs said: “Investors have been complaining about this bull market for equities for what feels like years. It is an odd situation, as it does not really seem like something you should be complaining about.

“Still, we get the point: things are getting pricey, particularly those stocks that everybody wants to own.”

He added the team is less inclined to “shoot for the moon” chasing maximum upside and prefers to focus on set investment targets and managing volatility.

“Holding this cash keeps our portfolio risk in-line with our targets at a time when we find bonds supremely unattractive and gives us the flexibility to take advantage of a correction – in bonds, equities or otherwise,” Coombs added.

Europe vs US

A long-term advocate of corporate America over Europe, Coombs recognises why many of his peers have backed European equities given the region’s improving economic growth prospects, but he is not joining the ranks.

“In the ten years since 30 November 2007, the S&P 500 has delivered a 79% return.

“The Euro Stoxx has fallen over that time – it is still below where it was before the global financial crisis.

“However, lately European economic growth has started to turn around, leading many investment managers to change their historically dreary opinion on European shares.”

Yet he argues as European inflation is to remain muted and growth most likely having peaked at 2.5%, concerns remain.

“For us to change our view on the continent, we would need to see: a reacceleration in global growth; a sustained increase in bund yields; better prospects for the financial and consumer discretionary sectors; a global adjustment where value companies outperform growth.”

He calls the European Union (EU) the “great, fundamental shortcoming of Europe”, lacking sufficient appetite for greater fiscal union.

“There are some great European companies – a few of which we own – but economic constraints mean we cannot bring ourselves to invest a substantial portion of our funds more widely in the EU. In short, we do not see 2018 being any different: US stocks will outperform European ones, in our opinion.”

Other key themes for 2018, beyond the touted US/Europe “conundrum”, will include a drawn-out Brexit, the acceleration of the gaming sector, Amazon’s multi-faceted threat and misplaced fears over China, as well as US tax cuts and stock dispersion.

The £250m Rathbone Total Return portfolio has returned 12.7% over the past three years to 4 December, according to FE.