Multi-Asset with Anthony Gillham, Quilter Investors

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  • 04 mins 33 secs
Anthony Gillham, CFA, Head of Investment, Quilter Investors, discusses being underweight in megacaps, the October sell-off and the influence of rising rates and inflation on his investment decisions.

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Multi-Asset Hub
PRESENTER: Joining me now is Anthony Gilham, Head of Investments for Quilter Investors. So, Anthony, it’s good to have you with us today. Now I want to start off by talking about the mega caps, talking about the darlings of Wall Street, the FAANGs. Now you’re underweight in these, why is that?

ANTHONY GILHAM: Yes, well I think if you look at some of the valuations, in a lot of those assets actually it’s quite challenging for us and quite difficult for us to get our head round some of those. You look at some of these, as you say darlings of Wall Street, the likes of Amazon for example on a price/earnings multiple of about 150 times. Really there’s been some quite spectacular expansion in those multiples, which I think has driven prices, particularly when we compare it to other areas of the market, to some quite unsustainable levels.

PRESENTER: Now, we did see a selloff earlier in October, what do you think this means?

ANTHONY GILHAM: Well so the selloff in October was quite interesting actually. It reminded me quite a lot of what happened in the first quarter of this year. Related to rising risk premier, related to we think some commentary around what the Fed’s up to. As we know the Fed’s been raising interest rates. And I think just some of the comments from some of the members of the FOMC, the guys who vote on interest rates in the US, I think caused investors to re-evaluate their risk premier that they’re allocating to how many rate hikes might occur into the future.

Now, linking that back to our darlings of Wall Street, I think there is a link there actually. A lot of these companies, companies like Amazon, Facebook, Amazon, Netflix, Google, the so-called FAANGs, these companies that really have quite high multiples on their earnings. Really I think as bond yields start to rise, and indeed have been rising, once the market starts to question whether or not those might have further to rise, I think that’s caused investors to question the multiples that some of these companies are put on. And for us that spells a bit of danger. So it’s an area of the market that we’ve really been avoiding.

PRESENTER: Now, you mentioned rising rates and rising inflation, so how is this influencing your investment decisions?

ANTHONY GILHAM: Well I think the risk premium angle is very important. And one of the things that we’re really focused on is downside defence, and trying to ensure that our asset allocation is capable of withstanding these types of market shock. Now diversification is obviously very important. So if you look at our asset allocation across our investment solutions you’ll see a highly diverse set of portfolios, obviously invested in traditional assets like equity and fixed income, but also less traditional assets such as hedge funds. So I think it’s important to remain diversified in this environment. Even when given what, give the market dynamics this year where we’ve really only seen the US, the US is the place to be, I think remaining focus, remaining discipline, remaining diversified in multi-asset portfolios is very important.

And I think the second thing to consider really is that point about risk premiums. Making sure that we’re exposed to parts of the market where we’re less exposed to rising risk premiums. And mega cap growth, these big technology companies, the so-called FAANGs I think are areas that as I’ve said we’re very sensitive to rising bond yields. And so I think we have to be careful about being over-allocated to those assets. And instead looking for opportunities where perhaps the market hasn’t rewarded strong fundamentals. Emerging markets would be a very good example of that. If I contrast what’s happened in the US, US equities as we know have done very well; emerging market equities have done very poorly this year, off around 20% so bear market territory.

Now I think from a downside defence perspective there could be an opportunity. There’s less of a valuation risk in some of those assets, and certainly I think we can identify some where there’s some strong fundamentals as well. So remain diversified and seek out some attractive value opportunities I think is what we’re looking to do today.

PRESENTER: Anthony, thank you.
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