Multi-asset manager Jane is using the recent pull-back in markets to buy domestically focused companies in the US and the UK – two regions that he is confident are on their way to recovery from the depths of the financial crisis.
Global capital markets have been rocked by news that the Fed is set to taper its extensive QE programme in the coming months; however, Jane says investors need to look past the initial panic that has swept through markets and remember why the tapering is happening in the first place. "For now, we can only concentrate on what we know," said Jane (pictured). "So what is going on? The Fed knows that the US economy is doing well so they are going to be stopping their stimulus. At the same time, US domestically focused companies look quite cheap."
Jane has cut the fixed income exposure in his £32m TM Darwin Multi Asset fund over the last few weeks as he is convinced that a bubble in bonds is now officially bursting. This has led to him having his highest ever cash weighting [20 per cent], which he is now putting to work in the equity market.
"We have been building up our cash and I am so glad we have done, we are now looking at good-quality domestic companies that can benefit from a recovery in the US and the UK," he said.
"We now have much less in global macro-style stocks like the ones we bought last year and a lot more in 'endogenous growth stories'."
Jane says that "endogenous growth stories" are companies that are not reliant on macro developments to do well, but instead focus on internal policy and practices.
"America is a self-sustaining economy, it doesn’t care what is happening in the likes of Brazil," he explained. "It has its own energy and resources and a wealth of well-educated people to sell their products."
"These domestically focused companies were cheap before the sell-off – now they look even better."
"I’ve just been looking through my portfolio and obviously I have all this cash, but what has been selling off the most in the UK has been the big international companies. A lot of the domestic stocks have been fine."
"ITV is a good example, where it is roughly at the same price as it was at the start of May. The same goes for Home Depot in the US."
Jane launched his TM Darwin Multi Asset fund in June 2011, since which time it has returned 9.25 per cent, compared with 8.52 per cent from the IMA Mixed Investment 20%-60% sector average.
So far this year, the fund has been a top-quartile performer in the sector, with returns of 5.17 per cent. However, it has been hit hard by the recent volatility in the market.
Performance of fund vs sector year-to-date
Source: FE Analytics
Despite the sell-off, Jane is ultimately bullish on equities and believes the recent correction will be viewed as a short-term blip in a longer-term bull market.
"It’s all about risk and volatility at the moment," he said. "It’s always been the case that when the bond market sells off sharply, equities sell off as well because they are more risky. However, given the reasons why they want to end QE, it is a good time to be holding onto equities."
Jane, former head of equities at M&G, says most of what he has sold recently to raise his cash weighting has been QE beneficiaries, such as emerging market bonds and bond-proxy assets.
"We now have a lot less in high-yielding equities, which have been very popular, and instead are now switching back to high-quality developed market companies," he explained.
"We don’t know the future, but as you might expect, we regard this sell-off as a basic correction in a bull market. I think that this is the end of the 30-year rally in bonds, with the end result being relatively bullish for equities."
"I think it should all settle down soon," he added.
Due to the constraints of the Mixed Investment 20%-60% Shares sector, Jane has to hold bonds within his portfolio. The IMA definition states that every fund must have at least 30 per cent in fixed income or cash.
He says he has a high cash weighting to mitigate the low exposure he has to bonds.
"We’ve got some index-linkers in the fund, which I am not overly happy about and we have a few short-dated government govies too," he said. "However, one of them has only got four days left until it matures, so that is basically cash."
TM Darwin Multi Asset has an ongoing charges figure (OCF) of 1.84 per cent and requires a minimum investment of £1,000.
Jane’s thoughts on bonds are echoed by Glyn Owen, investment director at Momentum Global Investment Management, who says the multi-decade rally in bonds has now come to an end and that bond yields will continue to rise.
"Following the Fed’s more hawkish stance than anticipated, we can now say with more confidence that the 32-year bull market in bonds is over," Owen said.
"The move down in yields on 10-year US Treasuries to around 1.5 per cent in the past year has clearly been driven by Fed action rather than valuations and we now face the prospect of a withdrawal of the liquidity and the strong likelihood that short-term interest rates will rise within investors’ short- to medium-term time horizon"
"This must mean that interest rates on bonds will rise further, particularly during the period of uncertainty in the coming months until the market knows the scale of the Fed’s tapering."
"Emerging market bonds and currencies have already sold off but further falls seem likely, especially in light of the negative news-flow from key emerging market economies."
Owen agrees that investors need to put the Fed’s decision in perspective, meaning that it is a positive move for equities.
"The falls in equity markets, especially in the developed markets, are a buying opportunity whereas bond markets are vulnerable to further weakness," he said.
"Ten-year US Treasury yields were at 4 per cent in 2010 and could easily go back there within the next couple of years."