According to one global fund manager there are plenty of ‘signs of ill health’ in global markets, strengthening the case for so-called cockroach shares.
It has been a strong first half of the year for various developed and emerging stockmarket exchanges, with Russia and China leading the way, returning 29.9% and 29.4%, respectively.
Even the much-maligned UK market has put in a strong showing, up 10.1% since the start of the year to end of June in total return terms.
But, despite stockmarkets being buoyant and shaking off the heavy losses made during the final quarter of last year, some well-regarded global fund managers are refusing to get carried away and instead have been moving to reduce risk in their portfolios.
One investor who has turned more bearish is Simon Edelsten, manager of the Mid Wynd International Investment Trust. He says that there are plenty of “signs of ill health” in global markets, which has led him to switch the style of the portfolio into defensive mode.
“It has been a long market cycle and one that we feel may be maturing,” he says. “More than half of the portfolio is now in defensive names, a position we added to a fair bit when the markets bounced back earlier this year. A couple of years ago, we had around 15% in defensive businesses.”
One sign of stockmarket exuberance is that the proportion of US IPOs for loss-making companies has now exceeded the record set in the tech bubble of 1999. According to Hamish Baillie, lead manager of the Ruffer Investment Company, “free money” (low or zero interest rates) and easy access to credit have distorted markets.
Valuations are another concern, with Edelsten pointing out that there are plenty of shares with cheap valuations, but most are in a sector or industry structurally challenged by technological advancements.
Instead, he targets quality growth businesses, those that possess some sort of barrier to entry in their armoury. Ten years into what is an ageing bull market, these stocks are far from cheap and produce steady, rather than spectacular growth. But Edelsten says that such companies can survive a nuclear war.
He adds: “We call these ‘cockroach stocks’ – they can survive economic grime unperturbed. Examples might be Vodafone, which has just had to cut its dividend but looks interesting again and is generating a 6% yield. In Japan, Nippon Telephone offers similar appeal. The phone will be one of the last things to go in a downturn.”
He adds that savers are nervous about buying into a bull market that is looking long in the tooth. In turn, that makes defensive equities – companies profitable and robust enough to survive shocks such as a full-blown trade war – attractive.
Similarly, James Thomson, manager of the Rathbone Global Opportunities fund, is adopting a more defensive stance than usual in his portfolio. He dedicates anywhere between 15% and 25% to recession-resistant businesses, those companies that are not as closely linked to the economic cycle or where demand is more predictable. At present, he has maxed out exposure to defensive names, holding 25% in such businesses.
He adds: “I have been increasingly investing in this area as I see macroeconomic growth as unreliable. Like an aeroplane flying close to stall speed, I think we could get some quite severe drops and then some big rises again, so we want balance in the portfolio. I now have 25% of the fund in these recession-resistant businesses, in sectors such as healthcare, food and beverage, pest control and care home firms.”