Are equity markets overvalued?
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- In uncertain times fund managers make tactical asset allocation decisions
- We look at why this fund manager believes they should be defensive on equities
The Global Cautious fund is a cautious growth vehicle that sets out to deliver a cash plus return and provide investors with significant capital preservation.
Here is a breakdown of their performance over the year:
Pyrford International ("Pyrford") are the appointed Global Best of Breed™ manager of the fund, who implement a multi-asset strategy to construct and manage the portfolio. They have been running this strategy for 24-years and have achieved a positive return in each of these years, demonstrating a tremendous track record of preserving investor capital.
At the start of 2020, equity markets prices were trading at a level of 21 times market earnings (PE ratio).
Equities recovered thereafter, despite the negative economic effects of Covid and lockdowns. Pyrford saw strong upward movements in equity prices to the extent that by June those better valuations had evaporated. The team decided to take the profits on the additional equity exposure and reduced the equity weighting back down to 25%. The equity weighting of the portfolio is shown in the chart below:
Since June 2020, equities have risen sharply and the earnings base for those equities has declined sharply. The PE ratio on the markets has risen markedly since that point, approaching 29 times earnings. Pyrford are concerned about equity market valuations at these levels as significant earnings growth is being forecast. Their view is that equity market are vulnerable at current prices, and have decided reduce the equity weight again in January 2021 to 20% of the total fund.Current Positioning
The fund aims to achieve a cash plus 3% return over rolling 3-years, with significant downside protection. To achieve this objective, Pyrford have adopted a defensive position on the fund and continue to follow a targeted value and quality driven strategy. The fund has 77% in bonds (32% US and 35% non-US), 20% in equities (8% US and 12% non-US) and 3% in cash. In terms of unhedged overseas currency exposure, we are on a fully hedged basis at 44.1%.