Invesco managing director Bob Yerbury started out as an actuary in the City. Lindsay Vincent finds out what the future holds for the global fund manager.

By and large, Westerners tend to regard equity investment as a superior form of saving. This is not the way it is viewed in China. There, equities are considered a superior form of betting. As declining indices in China this year illustrate, thousands of Chinese have recently torn up their betting slips and fallen back on traditional ways of playing the odds of risk and reward, such as mah-jong.  

One day the mainland Chinese will become like their cousins in Hong Kong, and temper these equity-focused, casino tendencies – a natural process that comes with greater investment experience and knowledge.

This is a process that Bob Yerbury, 64, for years a senior figure with Invesco Perpetual, and until recently its chief investment officer, has been absorbing since 1969, when he entered the City of London as an actuary. Today, in the twilight of his career, Yerbury may have stepped back from the all-powerful CIO post, but he remains head of asset allocation, a crucial element of group decision-making.

Additionally, he heads five Invesco Perpetual funds, principally the worldwide twins, the Global Equity fund and Global Smaller Companies fund, plus two managed, in-house funds of funds – one devoted to growth, the other to income. 

Yerbury is not yet of the view that emerging markets are the place for UK income seekers. His Managed Income fund has less than 8 per cent exposure to Asia and this largely means former colonial outposts: Singapore and Hong Kong. Yerbury says it will take time before emerging nations develop a dividend-paying culture – and patience before the Chinese adopt a ‘less emotional’ attitude to equities. ‘We have had a stock market in the UK since 1680 or so and China, about 20 years. If investors there are more volatile in their decision-making process, you will inevitably get high volatility in prices.’

Yerbury’s role in this four-strong stable of Invesco Perpetual funds is asset allocation. ‘I am in charge of the process, although it’s quite democratic,’ he says. Stock selection is the function of regional specialists, although Yerbury is solely responsible for stock selection in his investment trust, Invesco Perpetual Global Select. Investors will be familiar with the mantra praising the virtues of his mainstream UK income providers – global companies such as Vodafone, GlaxoSmithKline, BAT and other high-yielding FTSE 100 companies that do most of their business beyond these shores.

Given that so many income managers are also buying these counters, and that buy recommendations echo around the bourse, why are the prices of these giant companies so flat? 

Yerbury indicates there is a ‘tap’ on supply – a reality that has received insufficient attention. More and more pension funds are moving away from equities and into bonds, a process that gives more stability to the task of matching assets with liabilities. Pension fund managers, hit by market gyrations of recent decades (fluctuations that some might argue make the West not dissimilar to present day China) are saying: ‘How much further can this disinvestment go?

 ‘It has been the trend for a decade at least and I can’t see it changing,’ says Yerbury. ‘Local authority pension schemes are an exception [to switch away from equities] and there are still many [equity-focused]company schemes. But many are closing their schemes to new employees.’

Despite a poor recent past for corporate bonds, Yerbury is ‘optimistic’ about the immediate outlook. ‘The spread between corporate bonds and gilts can narrow a little. I don’t think there is a lot of value in government bonds because the yields are so low – 3.5 per cent on long bonds. In the US, 10-year bonds yield about 3 per cent.’ 

He adds: ‘But equity investors can find yields of 3.5 per cent and 4 per cent quite easily. Equities are more attractive but the corporate bond market is not a bad place to be, even if defaults might be more of a problem. But companies will be able to restructure now capital markets are functioning again.’

However, the wider shortage of credit, especially for smaller companies, is a ‘really serious’ threat to growth, not just in the UK but in many parts of the world.  He cites the example of a small retailer, whose mind is now on Christmas, the crucial trading period where profits cover losses of other months. ‘How is he supposed to buy in his stock? You can only get credit from the banks, and the lack of availability is a massive problem.’

But, Yerbury asks: ‘What are the banks supposed to do? Banks are being told to reduce their leverage and build up reserves. They are also told they must supply mortgages. It just doesn’t add up. All this talk about bonuses is trivial. A modern economy needs credit.’

Despite a build-up of inflationary pressures (UK inflation is way ahead of its 2 per cent target), Yerbury does not envisage an increase in interest rates. ‘The Bank of England will keep the rate at 0.5 per cent for most of next year. Further quantitative easing will be necessary until we have got banks back into rude health. Until then, what are we supposed to do about credit, ration it?’

Yerbury predicts it will be ‘five or six years’ before the UK emerges from the morass. But he is anything but negative about the fundamentals of equities.

‘There is one good thing in all this for investors: equities are cheap, whichever way you value them – price/earnings ratios, market price to cash flow, and so on. But the question we have to ask is, what will be the rate of growth of profits? What worries me is that, looking forward, profit growth over the next five years will be lower than people are expecting. That is the whole thing that prevents me piling in.

‘But you can find certain areas of attraction. Tobacco companies, for example, have prospered for years without volume growth, and telecoms and pharmaceuticals are areas where you can anticipate good growth.’ 

Technology is one asset class Yerbury suspects will withstand economic woes better than most. ‘Demand is not going to go away. Companies will always have a need to be more efficient, to run better,’ he says. Ten years after the bubble burst, he notes, Hewlett-Packard is roughly the same price it was in 2000.

While Yerbury says emerging economies are the global bright spots, he has ‘an issue’ with commodities in this environment. ‘I know China continues
to slow – not rapidly, but it is still slowing.’

Yerbury also advises caution where smaller companies, as an asset class, are concerned. ‘It is a difficult area because, generally speaking, investors are going to be increasingly reluctant to take excessive risks. But the great thing about smaller companies is that fund managers are always enthusiastic because they keep finding interesting businesses.’

Within his global smaller companies fund, Yerbury has backed smaller Japanese companies. In emerging markets, his Brazilian exposure is to domestic demand rather than ‘commodity-related’ businesses. The number of holdings nudges the 400 mark, a reflection of risk and liquidity. In contrast, his global growth fund has some 100 holdings, weighted around 15 per cent to the UK, in blue chips that are ‘cheap’.

Despite evidence of a sudden pick-up in European economic growth, Yerbury is not throwing his beret in the air. The road ahead is problematic. Much will depend on the euro retaining its lower exchange rate to the US dollar. 

Nontheless, at the UK’s expense, Yerbury has increased ‘stock specific’ exposure to the European element of his global smaller companies fund. He approves prime minister David Cameron’s determination to make UK debt reduction a priority. ‘As a government, this one has made a good start,’ he says.