Property push
An asset class Onuekwusi is particularly optimistic on is property, specifically in the UK, so much so that, in February, he told Portfolio Adviser that any manager holding cash in his
portfolio should “strip that cash out and put it into property”.
It is a view Onuekwusi still holds, and he is scraping the allocation limit in his cautious fund. He says: “We have a big chunk in direct property, which we see as very attractive. Because
of the natural illiquidity within the asset class we can only go to 10% exposure [in Multi-Index 3], and we are nearly at that maximum.
Supplementing that exposure with medium and high-risk portfolio weightings of 8.5% and 5.5%, respectively, it is clear that as far as Onuekwusi is concerned the phrase ‘hot
property’ is very much applicable in the current market.
“Our positivity on direct property began in 2013,” he says. “We are seeing growing rents in private and tertiary property, alongside an increase in regional transactions. This trend of
rising rents outside prime and central London property tells us the property recovery is strong and widespread, making it an attractive proposition.
“We invest in the L&G UK Property Fund, which takes a sensible approach regarding liquidity. It does not chase cashflows into the property sector, but waits for the right opportunities
to come along.”
With the FTSE 100 having closed at a record high of 7,089 points on 10 April, and the S&P 500 springing another record high just over month later, closing at 2,117 on 14 May, it now
seems a question of how much further the second-longest bull market for 60 years can run.
Equities account for a 55.9% chunk across Onuekwusi’s low, medium and high-risk portfolios, with his high-risk portfolio carrying an 83.5% equity weighting. As well as being confident the end is not yet in sight, he believes the current environment can keep on giving if investors
are willing to put their money on the table.
He says: “The equity bull market will only come to an end if one of three things occur. The first is if we move into recession. We are early to mid-cycle and interest rates have not
even gone up yet, therefore we think it is still an attractive environment for risk assets, and equities in particular.
“The second thing is if valuations get expensive then we will pull back our equity allocation. While bonds are expensive, equities look about fair value. However, there are pockets
of the equity market that look attractive from a valuation perspective, such as emerging markets.
“The final point is systematic risk. This could be a European sovereign default, in this case Greece, which would spill over into other countries. Another risk is a Fed interest rate increase coming ahead of market expectations, and the final one is a Chinese hard landing and a spillover into markets.
“Taking all of the above into account, portfolios should be adjusted to be slightly above risk, and tilted towards equities and risk assets.”
Faith in Europe
While Onuekwusi’s funds illustrate a marked conviction towards UK stocks – which account for 21.2% across his three portfolios and 30.5% of the high-risk holdings – it is in the European
equity space where he is placing his faith, particularly in light of lower oil prices, with Brent crude at $66 (£42) a barrel (as at 18 May).
“Europe will benefit from the fall in oil price in a net perspective more than the US will,” he says. “Everyone is seeing the US economy doing well, but it makes sense to look at export
and imports. The US exports a lot of oil as well as importing, and, naturally, the lower oil price hurts those companies, so on a net perspective we expect Europe to do better than the US.
“There is also the fall in the euro, which benefits European exporters. There is always a debate over whether quantitative easing impacts on equity markets, but taking all the factors into account we are positive on Europe versus the US and are looking to phase in
our European equity allocation over the next few months.”
Onuekwusi’s European equity allocation is already at 18.2% across the portfolios via the L&G European Index Trust, but with valuations likely to rise as opposed to coming down during
the next few months, why wait to raise the stakes?
“The oil price fall and weakening euro will not translate to earnings immediately,” he says. “It will take time to come through, so we have a window in which to phase that allocation into
the funds.
“The Greece debate will take us right to the edge of the precipice. We have hedged the Europe fund completely into sterling in case of a Greek default adding to any existing euro weakness already in place because of quantitative easing.”
So while ‘index’ may be the word that stands out when reading the Multi Index moniker, when it comes to putting their money where their mouth is, it seems the LGIM team arenot afraid to get their hands dirty.
