A Contrarian View
23/08/2010
Fund manager Andrew Green of GAM is well-known for his deeply contrarian approach to investment - preferring to avoid investment fashions and instead seek out low-valued companies that are deeply disliked by the markets but which are fundamentally good businesses looking for a recovery catalyst. The last ten years have not been particularly kind to equity investors but Andrew has a proven track record of out-performance over the longer term. He recently shared his views on the markets and how these affect his portfolio strategy. Current economic data is still mixed and suggests that recovery in developed economies remains weak and potentially at risk. How authorities in these areas respond to this, given their fiscal constraints and current monetary policy settings, remains a significant question for investors. With the risk of a policy mistake as high as it has ever been, sentiment is likely to remain nervous and markets febrile so the main challenge has been to keep out of trouble as equity markets whiplash to and fro.
With this in mind we raised the portfolio's allocation to cash at the end of the second quarter - back up to around 18% - although the overall strategic positioning of the fund remained otherwise unchanged. The cash allocation weighed on the portfolio's performance as the market rose in July, though its impact was partly offset by gains in our banks and insurance holdings. In particular, portfolio performance benefited from an announced bid for long-term holding SSL during the month - it was a good solution to realizing a 300% profit - and I have also taken gains of 160% from Spirent. In the US the pharmaceutical stocks have done well along with Sara Lee and El Paso. In the UK, banking stocks have done well and in the long term they will continue to recover as they remain a crucial component to financial stability and economic recovery. Although Japan has significantly under-performed global markets my conviction that it is entering a period of out-performance remains robust - it has become totally loathed by investors which for me, as a contrarian, is positive and I am comfortable maintaining my 23% exposure to this area. Japanese bond yields are back to their lows of 2003 and with companies having so much cash on balance sheet it really only needs for the government to tilt the tax system in favour of payment of dividends for a renaissance in investor interest to begin. The strength of the yen is problematical and likely to be reversed so within the portfolio the exposure has been reduced via hedging. Our holdings have performed relatively well - they have beaten the Japanese market in each of the last five years - and I continue to concentrate on the IT, telecom and banking sectors.
Overall I am gradually moving away from small and medium cap stocks into larger companies where I see greater safety in the near term. People are obsessed with Emerging Markets and whilst undeniably we are seeing the West cede power to the East, it is a long-term story and in the short term those markets are very expensive in my view. So whilst I am very positive in terms of new ideas, the earnings outlook remains opaque and I anticipate using the elevated cash levels in the portfolio to take advantage of opportunities presented over the medium term by ongoing volatility in the equity markets."
Andrew Green manages the St. James's Place Recovery Fund and GAM Managed Funds.
