Aldridge, manager of the M&G Global Growth fund, says he is confident that global economies will continue to recover, and believes that cyclical stocks will undoubtedly deliver higher returns than defensives on a five-year view as a result. Although the income characteristics of defensive sectors are understandably attractive, he says the fact that they are historically expensive and tend to be left behind during economic expansion points to cyclicals being a much better bet at the moment.
"Markets have moved quite quickly in recent months and I wouldn’t say that markets, on the whole, are expensive or overbought. Where valuations do look quite stretched is in the more safe stocks such as consumer staples," he said.
"It is becoming challenging to justify those high valuations, even though I can understand why they are popular with investors, as people are still looking for safety and capital preservation."
"Nevertheless, when you look at the other end of the spectrum I think cyclicals, especially if you take a longer term view, look very attractive. We take an optimistic view of the world and in five years the global economy will be in a much better position than it is now."
"Because of that, we are willing to hold more cyclical stocks and weather the volatility," he added.
Aldridge joins a growing group of managers who believe that defensive sectors are overvalued.
The likes of Invesco Perpetual’s Simon Laing and BlackRock’s Mike Prentis have recently re-positioned their portfolios towards cyclical stocks, pointing to the consumer staples sector as a particularly overbought area.
While Aldridge is optimistic about riskier assets in the longer term, he says investors need to be patient, which they can afford to be if they have a reasonable time horizon.
However, he thinks the fact there has not been a significant correction throughout 2012 bodes very well for the future.
"It’s like taking a long-term view on anything," he said. "Equity valuations may well look attractive but what is going to change their prices over the coming years?"
"Over the last six to eight weeks we have had the issue in Cyprus and some disappointing numbers coming out of the US, so it may take a while," he said. "One thing though is that markets have certainly become more resilient."
Performance of indices over 3yrs
Source: FE Analytics
"In 2011, equity markets witnessed a real downturn, last year it was less pronounced and this year markets haven’t sold off dramatically despite some bad news," he added.
Aldridge has managed the £957m M&G Global Growth fund since April 2007, taking over from FE Alpha Manager Graham French.
According to FE Analytics, over this time the fund has been a top-quartile performer in the IMA Global sector, with returns of 45.95 per cent.
It has also beaten its benchmark – the MSCI AC World index – which has returned 39.49 per cent.
Performance of fund vs sector and index since April 2007
Source: FE Analytics
However, Aldridge’s fund has been more volatile than the sector and the index over this time.
M&G Global Growth’s two largest sector weightings are to industrials and information technology, both of which are typically viewed as cyclical areas of the market. They make up 17.5 per cent and 16.7 per cent of the fund, respectively.
The manager says he has recently trimmed down his exposure to consumer staples given current valuations and the improving global economy. His weighting to the sector currently stands at 11.5 per cent.
"I was looking back through the portfolio recently and about five years ago I was talking a lot about these more defensive companies – we were thinking about filling the portfolio with global brands and consumer staples," he said.
"However, I had to stop myself doing that – which was a good thing – as we used to have a large overweight in defensives and now it is about a neutral position."
Although the manager does take the macro into consideration, he says when running a global growth portfolio it is crucial to take a bottom-up approach as short-term headwinds tend to disappear very quickly.
"I like the fact that people refer to macro events as market noise," he said.
"On a five-year view, it tends to be that that is exactly what it is – noise. When you look at events that looked scary at the time over the last five years, they are quite quickly forgotten. By taking a bottom-up view, you can ignore this short-term noise."
"The great thing about this fund is that we don’t have to have a set country allocation. It gives us enormous freedom and that is what has, and will, drive returns going forward," he added.
M&G Global Growth has an ongoing charges figure (OCF) of 1.67 per cent and requires a minimum investment of £500.