Buoyed on by a gradually improving economy, low starting valuations and huge amounts of money printing from the Federal Reserve, the S&P 500 has performed exceptionally since the period after the financial crash of 2008.
Performance of indices over 5yrs
Source: FE Analytics
However Brookes (pictured), who heads up the Cazenove Multi Manager range, has next to no exposure to the US market, claiming it is well overvalued.
Although he still favours equities over other asset classes, the manager says investors need to be very selective because parts of the market – such as the US – will significantly underperform over the coming years. He adds that it is becoming difficult for investors to preserve their capital in the current environment of ultra-low interest rates and steadily rising bond yields, making caution over valuations essential.
“Bonds are higher risk than they have been before, so that’s why we have cash levels of 30 per cent across our diversity funds,” he said.
“Are equities the answer? Well, at its current levels the S&P 500 is looking pretty expensive. In fact, if you were to ignore the ‘TMT bubble’ in the late-1990s, the last time the S&P was this expensive was in 1929.”
“We all know what happened after that, there was a huge financial crash followed by the Great Depression and eventually the Second World War.”
“Anyone feeling bearish? OK, I don’t expect a massive crash, but would I be surprised if the US were to markedly underperform from now on? No, I wouldn’t,” he added.
Brookes’ flagship portfolio, which he co-manages with Robin McDonald, is the five crown-rated Cazenove Multi Manager Diversity fund.
The now £1.3bn fund was launched in September 2005. It has been the third best-performing portfolio in the IMA Mixed Investment 20%-60% Shares sector since then, with returns of 70.9 per cent.
Performance of fund vs sector since Sep 2005
Source: FE Analytics
It has also beaten the sector average over one, three and five years.
Cash makes up 29 per cent of the fund as Brookes and McDonald see little value in the bond market. The rest of the portfolio is made up of equities and alternative assets.
Although he still rates equities’ chances over the long-run, Brookes is concerned that investors are expecting too much in terms of this year’s earnings growth – a view shared by Investec’s Alastair Mundy.
He expects some sort of correction in the market over the coming year to bring P/E ratios back down from their current high levels, but is worried that so many managers are increasing their equity allocation.
“The worry for me is that the majority of managers are becoming more bullish,” he said.
Quoting the ML Fund Manager Survey, Brookes says that investors have been steadily returning to equities since the second quarter of 2009. However, the average fund manager’s weighting to equities has now reached the highs of 2008.
Brookes says going into equities is not an issue in itself, and he is favouring other, cheaper, areas of the market such as Europe.
“Europe is coming out of recession a year earlier than expected,” Brookes said. “Funding for peripheral governments has improved and financial conditions in Europe are getting better, which indicates that stress is easing.”
“It also remains unloved and undervalued form a historical perspective,” he added.
European equity markets have been on a gradually upward trend over the past 18 months since Mario Draghi’s “do whatever it takes speech” in 2012. However, Brookes says the rally still has legs as the market is so cheap.
For his European exposure within Cazenove Multi Manager Diversity, Brookes has decided to use the in-house Cazenove European Income fund, managed by James Sym.
The £225m fund was only launched in May 2012. It has returned 66.13 per cent since then, beating both the IMA Europe ex UK sector and its benchmark – the MSCI World Europe ex UK index – by more than 20 percentage points.
The fund is yielding 3.4 per cent.
Brookes is also bullish on Japan. He is a fan of prime minister Shinzo Abe’s plan to reflate the Japanese economy after nearly two lost decades of deflation.
He hopes that the Bank of Japan will continue its stimulus programme as he says if the yen weakens much more it will make Japanese exporters even more profitable.
GLG Japan CoreAlpha, which is headed up by FE Alpha Manager Stephen Harker, is Brookes' fourth-largest holding in his Multi Manager Diversity fund. It makes up 4.94 per cent of its total assets under management.
Harker is viewed as one of the best Japanese managers available to investors.
Since he took over the £1.2bn GLG fund in January 2006, it has been the second best performing portfolio in the IMA Japan sector.
Although it has only returned 44 per cent over this time, its TOPIX benchmark has made just 7 per cent while the average fund in the sector has lost money.
Performance of fund vs sector and index since Jan 2006
Source: FE Analytics
Brookes said: “More controversially, we also like commodity equities.”
Commodity-related funds have been some of the worst-performing open-ended portfolios over recent years as issues such as the slowdown in emerging markets have meant sentiment has turned increasingly negative.
Brookes holds JPM Natural Resources and FE Alpha Manager Evy Hambro’s BlackRock Gold & General fund.
Both funds have struggled immensely recently, losing around 50 per cent over three years.
Performance of funds over 3yrs
Source: FE Analytics
However, Brookes is backing commodities to outperform over the coming years, saying the asset class as a whole will experience a turnaround in fortunes over the coming few years.
“Commodity equities are back to 2005 levels. Sentiment is poor and too many people are focused on Chinese economic growth slowing, which it will, but not down to zero.”
“Also, new professional management teams have come into mining companies who aren’t going to spend at the levels they have done in the past.”
Brookes’ Cazenove Multi Manager Diversity fund has an ongoing charges figure (OCF) of 1.59 per cent and requires a minimum investment of £1,000.
