Not so sweet - What should fund managers tell clients if their asset class gets really expensive?
When does an asset class become so expensive that even the fund managers specialising in that area will admit it? It is a pertinent question at a time when, although we would not go so far as to suggest investing in fixed income is like picking up pennies in front of a steamroller, it is only a matter of time before UK interest rates start to rise from their 300-year lows.
At almost every fixed income presentation The Value Perspective has seen this year, the fund manager will go so far as to admit their asset class is not fantastically cheap as a whole and that the environment is only going to get harder. Then comes the ‘but’ as they highlight the interesting opportunities only they have identified in the obscure ‘sweet spot’ between AAB and BAA bonds or whatever it might be.
Each time at this particular point in the presentation, two things have prevented us from laughing out loud – professional courtesy and the nagging question as to what we ourselves would do should equities start looking as overvalued as bonds do now. Will we too pay lip-service to our market being crazily overvalued before arguing our holdings are by far the best of a bad bunch?
The history of investment is hardly awash with examples of fund managers warning people to stay away from their funds. Respectful of history as we may be, however, one thing that may keep us honest here is that we have already started telling our clients we believe the market is looking marginally overvalued and, as value investors, we can only do as the opportunity set indicates. And if the market were to become really expensive? Well, time – as it always does in investment – will tell.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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