Ryan (pictured), manager of the Lazard Global Equity Income fund, says stocks in the US are expensive and even though its economy is clearly improving, the lack of bargains means many investors will have to settle for underperformance.
Investors also need to be wary of Global Equity Income funds that are overweight the country, he warns. "I think [the US] is going to underperform. As the global economy improves, the US will lag. And if the market goes the other way, the market is simply vulnerable," he said.
The S&P 500 index has picked up more ground since the start of the year than other developed market indices – the FTSE 100 and EuroStoxx index in Europe – gaining 27.78 per cent.
And it is certainly well ahead of the battered emerging markets, which have fallen 1.98 per cent since 1 January.
Year-to-date performance of indices
Source: FE Analytics
Ryan, however, prefers the undervalued and stable companies of Europe.
"European stocks are still fairly cheap," he said. "What’s encouraging is earnings in Europe are still well below their peak. In the US, earnings have gone through that peak."
"Europe still has room to rebound cyclically."
Ryan’s views coincide with those of Henderson’s Ben Lofthouse, who told FE Trustnet earlier this month that Europe currently offers the best opportunities.
However, the manager says he firmly believes in an imminent emerging markets turnaround, particularly as the sector has underperformed developed markets for more than two years.
"Emerging markets are out of favour, so we’re able to buy cheap companies with growing dividends," he said.
One of the biggest headwinds facing developing markets is the inevitable tapering of the US's quantitative easing programme, but Ryan says concerns about this issue have been overplayed.
"Emerging growth is more resilient to tapering than people think," he said.
"Emerging markets are trading on 12 times earnings. That’s a pretty appealing level, so we’re able to generate a higher return on equity. A discounted valuation with a higher return on equity is appealing to us."
Ryan adds that individual economies in emerging markets are in fact in a stronger position financially than their developed world counterparts because debt-to-GDP levels are low and falling, while debt continues to rise in the western world.
"Macro fears in emerging markets are creating opportunities," he said. "I’m excited about the BRICs, except for India."
Ryan says he is avoiding India purely on a yield basis as he has been unable to find companies in the country that pay a reasonable or growing dividend.
One stock he particularly likes is the Agricultural Bank of China.
"It’s one of the fastest-growing banks in China. It is well capitalised and trading on seven-times earnings with a yield of over 6 per cent. I think it will grow its yield for the foreseeable future," he added.
Ryan says he is also looking further down the market cap scale now that the global economy is on the road to a slow recovery.
"We’re very underweight healthcare and staples, which you would expect to be the mainstay of an income fund, but we think big, blue chip stocks are overpriced and vulnerable to interest rate [rises]. When bonds yields go up and rates rise, it will weigh on large caps," he said.
The fund is currently yielding 4.75 per cent, the highest in the entire IMA Global Equity Income sector.
However, the fund has lagged behind its peers over the short-term on a total return basis. It has underperformed the sector and MSCI AC World index over the last 12 months and trailed the sector, marginally outperforming the index, over three years.
However, it has delivered benchmark-beating returns of 90.52 per cent over five years, nearly 5 percentage points more than the sector average.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund aims to generate a substantial income of 5 per cent as well as long-term capital growth. It invests across the market cap spectrum, searching for companies with a strong or growing yield.
"We’re not happy unless we beat the market and generate a 5 per cent dividend yield," Ryan said.
As the manager mentioned, he is finding the BRIC economies more and more attractive. An overweight position in major Brazilian bank Banco do Brasil and Brazil-based holding company BB Seguridade Participacoes has helped the fund in recent months.
US companies such as global investment and advisory firm Blackstone and Louisiana-based communications firm CenturyLink hindered the portfolio.
The largest overall regional weighting is to continental Europe, where Ryan believes earnings still have plenty of room to grow.
The fund requires a minimum investment of £2,000 and has ongoing charges of 1.56 per cent.
