Brookes, who co-manages the Cazenove Multi-Manager range, has close to 30 per cent of his £1.2bn Cazenove Multi Manager Diversity fund in cash. The manager says that the main reason for this is that he sees no value in traditional fixed income and supposedly safe assets such as gilts. He says bond-holders will be hit by further capital losses as yields rise, and because of that, he is happy to hold a lot of cash.
"We think the bond market is expensive," he said. "Assets perceived as safe command the highest valuations, bonds in particular. However, risk is a function of the price you pay, so this presents a problem."
"Normally, I will have some equities and the bonds are in the fund to bail me out if markets fall. However, as June showed, all asset classes can go down. If there is an asset class that can protect you, I don’t think it is bonds."
"People question why we have so much in cash and say it will give a negative real return, but gilts have lost you money this year," he added.
As Brookes points out, investors in gilts have been hit with capital losses this year. According to FE Analytics, the FTSE British Government 10-15 Years index has lost more than 5 per cent and as the graph shows, the index was hit hard by Ben Bernanke’s talk of QE-tapering in late May.
Performance of index over 1yr
Source: FE Analytics
However, Brookes is also concerned about parts of the equity market.
Although he is still reasonably bullish on Japan and Europe, the manager is worried about the US. Brookes says the S&P is looking toppy and at some stage the gap between valuations and earnings needs to be closed.
On top of that, he says equity investors are starting to become complacent with the already high returns they have seen over the last few years.
"The concern is that everyone is happy with markets and have made a lot of money recently. It’s not to say we need an economic recession, but some markets need the froth taken out of them, the US being one," he said.
Performance of indices over 1yr
Source: FE Analytics
Our data shows that the S&P 500 and the FTSE All Share have both returned more than 20 per cent over the last 12 months. However, Brookes says the relative lack of earnings growth means investors should not get carried away.
The manager is happy to sit on "dollops of cash" due to the distorting effect the world’s central banks have had on the market.
He says that not only do bonds offer little protection, but as less economically sensitive defensive equities are now so well-owned because of their income potential, they could be hit even harder in a correction.
"Our bearishness surrounds US equities and most bonds. However, we are not in the mind-set of investing in super-defensive high-yielders because everyone is either buying or is already invested in those."
Brookes says that the eventual tapering of QE and the fiscal stand-off in Washington both have the power to de-rail the positive sentiment and cause a self-off.
He adds that the fact that a number of fund managers are becoming increasingly bullish is another cause for concern.
"If you can find a bearish manager, please let me know," he said.
Brookes explained that one of his more bearish holdings used to be Hugh Hendry's CF Eclectica Absolute Macro fund. However, Hendry told investors last week that he is raising the risk in his fund, because although he still thinks markets are built on sand, the sentiment that is driving them seems to be unstoppable.
"Hendry has basically been saying that he doesn’t understand what is going on with equity markets, but it will keep going up as it is self-feeding," Brookes said. "Investors don’t know why the market keeps going up, but want a piece of it."
"Crispin Odey, who is normally always bullish, says that there is a problem and that problem will be in 2015 if capex and growth don’t come through," he added.
Brookes says that Hendry’s change in stance presents a problem, however. When asked whether he would be decreasing his exposure to the CF Eclectica Absolute Macro fund given its new and more positive outlook, he was diplomatic in his answer.
"We might have less there at the end of the year than we do now, but it won’t be zero. If we want to invest in a bullish manager, there are plenty of them out there," he added.
Brookes manages the Cazenove Multi-Manager range along with Robin McDonald.
They have been in charge of the Cazenove Multi-Manager Diversity fund since October 2007.
It is a top-quartile performer in the IMA Mixed Investment 20%-60% Shares sector over that time, with returns of 37.03 per cent.
Performance of fund vs sector since Oct 2007
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 1.59 per cent and requires a minimum investment of £1,000.
