Search for best opportunities in global markets

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  • 34 mins 44 secs
Robert Bailey, Head of UK Wholesale Distribution, hosts this session looking across the global markets in the hunt for opportunities.

Bailey gets the insights of Jamie Hooper who recently joined Richard Peirson to co-manage the AXA Framlington Managed Balanced Fund and Nick Hayes, Global Bonds Fund Manager.

Hooper and Hayes discuss their view on the UK market and regional equities and explain the best ways to manage your exposure through positioning.



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ROBERT BAILEY: Hello and welcome to today’s AXA Investment Managers’ webcast. I’m Rob Bailey. I’m Head of UK Wholesale Distribution at AXA Investment Managers. Today, I’m joined by two fund managers: Jamie Hooper, Co-Fund Manager of the AXA Framlington Managed Balanced Fund; and Nick Hayes who’s a global bond manager. As always, we welcome your questions. So if you’re watching this live please click on the tab in front of you and submit those, and we’ll answer as many as we can during the course of today’s presentation.

Let’s move on and talk a little bit about the Managed Balanced fund. The investment team that Jamie’s a part of here, Jamie’s the Co-Fund Manager who runs the Fund alongside Richard Pearson. Nick is specifically responsible for the bond portion of the portfolio. Jamie, you work as part of a broader investment team with this Fund. Talk us through how you manage the Fund as a team and how you utilise the other resources within AXA Framlington Equities.

JAMIE HOOPER: Firstly, good morning Rob. In terms of the Managed Balanced, the proposition is very simple and transparent, and that’s deliberate. Effectively, it is a global equity portfolio with a bond/cash hedge. We’re very mindful that when we run these assets we’re very cognisant of cautious conservative investors who don’t want too much volatility. Therefore the importance about the hedge is that we can understand it, it is not complex, it is not costly, but ultimately it is not correlated to the equity returns. Equally, the equity returns are divided regionally amongst experts at AXA Framlington Equities who can then run those assets as they see fit. We generally run our assets looking with a GARP (Growth At A Reasonable Price) bias looking for consistent repeatable growth.

ROBERT BAILEY: And you run the Fund alongside Richard Pearson but you’re specifically responsible for the UK equity proportion of the portfolio.

JAMIE HOOPER: That’s correct, yes. The UK currently represents about 35% of the portfolio. Richard and I have worked together for over nine years now. We look at assets in very similar ways. We generally have a bias towards large caps, although we populate the portfolios with mid-caps as well. The hallmark of the UK component though is to provide consistent growth. It almost frees up the risk budget for those regional carve-outs to take higher risk in our portfolios.

ROBERT BAILEY: OK. Just looking at the performance of the Fund, the Fund has delivered outstanding returns over the time period1 here running from February 1994, consistently outperforming the benchmark. It’s reached about £940 million in size. And managing those scale of assets and in the way you manage them against a testing macro backdrop, we’ve had a lot of volatility in the first part of this year, how do you see things playing out on a macro scale?

JAMIE HOOPER: Yes. So investors are concerned. Probably quite rightly at the moment, there’s a number of factors that are of issue. Firstly growth appears to be slowing, liquidity is tightening, credit spreads are widening and in some areas profits are peaking; however, our central view is we don’t slip back into recession and we certainly don’t return to the problems of 2008.

ROBERT BAILEY: And looking at this slide here, we’ve got a number of the personalities that are driving that. I mean naturally you spend a lot of time focusing on the corporate elements, how companies are doing, how businesses are evolving, but you’re working at the moment against a backdrop of a lot of volatility and uncertainty. How does that play out and what do you see as the key drivers that come from that?

JAMIE HOOPER: Yes, it’s a good point, Rob. I mean we spend a lot of time trying to understand the macro drivers, accessing both external and lots of internal information; however, ultimately, we’re stock pickers. And therefore we need to understand the framework in which our companies are operating with, but ultimately it’ll be about longer-term structural trends. You know, the success of investing in our opinion as long-term investors isn’t about next week’s non-farm payrolls; it’s about understanding strong structural trends and finding companies that can compound returns over time. So useful, informative, it sets a framework, but ultimately it’s about buying good companies and sticking with them.

ROBERT BAILEY: And Nick, as the man responsible for the bond elements of portfolio, you’re probably much more focused on the macro impact?

NICK HAYES: Yes, certainly, I mean clearly the macro environment drives vastly what’s happening in the global markets. None more so than the last seven or eight years, where initially the 15, 20-year global bond market rally got a big further leg up once we had the Global Financial Crisis. And subsequent to that we’ve seen rounds and rounds of QE, very, very loose monetary policy, and so the global macro has been very much driven, and the global bond markets have been very much driven, by what’s happening in sort of macroeconomics. And I guess also politically it’s become very, very important or sensitive, if you like. So we have, with the sensitivity around more and more QE, you have shorter political cycles. When we do our quarterly forecasting increasingly over the last few years we’ve had external experts coming in to talk about what’s happening in the geopolitical sense, and that’s been a big driver of the assets that I look at, specifically in this Fund on the global bond market. So interest rate sensitive assets are very much driven by the sort of geopolitical, the economic and the macroeconomic.

ROBERT BAILEY: And in terms of what we’ve seen so far year to date, Jamie, what are the key influence or the key factors? I mean we used this slide here with these political characters and there’s a general evolution now as we see some of the characters coming in from the US presidential race for later on. What are the things that you’re looking for in your decision making?

JAMIE HOOPER: Let’s kick off with growth. I think that’s probably a good place to start. You can see from this chart this is the progression of global GDP across various regions going back to 2014. It clearly has slowed. Certain areas have done better than others, Europe, but again in recent times those numbers look slightly more problematical. What are the issues; lots of deflationary pressures, whether it be China, concerns about a hard landing, devaluation of the currency, bad debts coming out of the banks, capital flight from emerging markets, commodities collapsing and simply the technological disruption from UIT (Unit Investment Trust) which is causing deflationary pressures. If you put all of those together, global growth is still very sluggish. Now we would say cautious but not catastrophic. But again you have to remember against that backdrop risk assets, the S&P, the US main index, has trebled from the market lows, compared to the real world which you can see has failed to get out of this trajectory of 2 to 3%. But again I make the point we don’t see a recession.

Now the right hand chart looks at the US and particularly manufacturing data which is concerning some people. If I could just explain that chart briefly, it looks at the manufacturing ISM data in the United States. 45 is the magic number, you can see the line is falling. When the ISM has hit 45 historically that is called 11 of the last 13 US recessions. So having said it’s emanating from China in emerging markets, it feels like the US may be getting caught up in this, problems with the oil price, the strength of their dollar. However, I think our central case still remains there is no large investment or credit boom. No bubble that’s about to burst. Secondly, inflation isn’t rampant and therefore we don’t see a rapid rise in interest rates. And when we look around the world, labour markets, the consumer, housing, still feels OK to us. So our central case is that data probably starts to get better as the year progresses. So growth is sluggish, maybe anaemic, but as I said not a catastrophe.

NICK HAYES: I think there’s probably also been a shift, hasn’t there, we got very used over the last five, six years to seeing a stronger emerging market world, whereas certainly Europe and to a lesser extent the US and UK economies were struggling. But I think now in 2015/16 and arguably in 2017, you’re seeing a bit of a shift away from a deteriorating trend in the global emerging market world. We’re actually probably bottoming out in Europe and strengthening in US. And on an absolute level that might not look the case. If you look at the global emerging market growth levels are much higher than elsewhere, but it’s not about the absolute level, it’s about the relative.

Whereas the market’s expectation of where Chinese growth is going, clearly that’s on a downward trend. Whereas the market expectation of where US growth is going, there is some question marks shorter term. But I agree with Jamie that this ultimately is sort of probably getting too bearish now and I think looking forward you could easily see a few more rate rises, although those are starting to be priced out in the actual bond market.

ROBERT BAILEY: Yes and when we looked at the gallery before Janet Yellen is clearly one of the key figures that must be at the forefront of your mind with regards to her leading the policy decisions in the US. How do you see that playing out over the next 12 months or so?

NICK HAYES: Certainly, if you look at what’s happened in the last couple of months, the bond markets are pricing in less and less interest rates. Three or four months ago you might have said you could expect two, three, four rate rises in the US; now that’s coming down certainly to somewhere between zero and 2. So we’re getting to a world where people are increasingly seeing the US as being an outrider as having risen interest rates coming off at a zero interest rate policy, whereas Japan, Europe, Switzerland, etc. are on negative interest rates. So the US looking a little bit of an outlier, but as I say if the economic data continues to be gently supportive, then we could see one or two rate rises for the rest of this year and ‘17/18 maybe a couple of more.

NICK HAYES: Bond market’s priced the other way. Bond market has started, back end of last year, saying we would have three, four rate rises and now suddenly we’re pricing out nearly all rate rises. As ever, markets have gone too far one way or the other and, at the moment, we’re pricing in a very, very sort of dovish Fed rate at the moment.

JAMIE HOOPER: I think this just, continue onto the next slide Rob, actually, this kind of makes the point that the market’s sort of uncertain about certain rules at the moment, and it’s unusual for the Fed to be perhaps raising rates so late in a cycle, especially with deflationary pressures.

NICK HAYES: And I think part of the problem is that we have lived with QE for five, six, seven years and unwinding some of that is going to be unbelievably complicated. You could argue that the last five years have been a very low volatile environment. You’ve had very strong equity gains, you’ve made decent money in most credit markets and even government bonds, having started the cycle at being low yield levels, are even lower now, so the returns across most asset classes have been pretty attractive in a relatively low and volatile environment. Central banks have been supporting capital markets.

If you start to believe that we are at the end of the zero interest rate policy in the US, then that’s bound to create some dislocation, that’s bound to create some volatility, and I think we’ve started to see that pick up. How complicated and how severe that’s going to be over the next years is clearly what people are debating now and repricing. But from our bond world, you’re starting to see government bonds look pretty expensive. But outside of government bonds there’s probably more opportunities in other parts of global fixed income. On the equity side, there’s some really attractive opportunities in there.

ROBERT BAILEY: And Jamie, on this slide, talking of liquidity, one of the conversations we’ve had on many occasions is around there being no new news in January and February and that there was more sellers than buyers. And clearly one of the key sellers have been sovereign wealth funds. How does that impact you in the equity proportion of this Fund?

JAMIE HOOPER: Yes, so one of the big drivers of this bull market has been surplus liquidity. The argument often is that money’s ended up in Wall Street, rather than Main Street, which is back to my comment about the trajectory of the real world has kind of struggled. In terms of tightening liquidity, there are two or three drivers that were huge tailwinds that I think have started to become headwinds. And if you have slowing growth, as referred to, multiplied by tightening liquidity, generally risk assets find that quite troubling, at least in the short term.

One of the points you raise is sovereign wealth funds. Quite simply approximately $4.5 trillion are linked to oil exporting countries. Between 2000 and 2014 the average oil price was $90; between 2014 to date it’s under $50. Therefore we are seeing sovereign wealth funds liquidating assets to sort out social needs and deficits or surpluses at home, and this chart simply highlights that the finance area, either have lots of holdings in the finance sector, and I think that’s probably why you’ve seen some weakness. The second and probably more important issue is the one of central banks. This chart on the left hand side aggregates globally all the central banks.

So, whilst we still have Bank of Japan and the ECB pumping more money through quantitative easing, that is dwarfed by the effect of the Fed stopping in the fourth quarter of 2014. When you add the problems of slowing growth in the oil, it almost feels that that policy effect is waning. I’m sure Nick will have very strong views on this, but we feel like we’ve slipped from quantitative easing to almost quantitative exhaustion. And the final driver, which isn’t referred to in the chart, is share buybacks. It’s been a big driver, a big demand for equities over the last few years, particularly in the US. Again that feels like that’s starting to slow as companies have already releveraged their balance sheets.

ROBERT BAILEY: OK. So let’s move on and talk about the tightening cycles of the Fed and I guess the left hand side of this which is the cost of financing on the rise, how do companies react in that kind of environment?

JAMIE HOOPER: Yes, so this is both a corporate issue, but it’s also part of the reason that the market’s being spooked. And we’re talking about the market being spooked but you have to remember lots of asset classes actually peaked in the second quarter of last year. This ties up very neatly with the end of the Fed sort of quantitative easing.

What does this chart look at? Well, the black line is the S&P, the blue line is the US high yield spreads inverted, and it’s trying to highlight that there’s some relationship, and certainly last month there was a disconnect between what the high yield was telling you versus what equities have told you, and clearly there’s been a correction in market to reflect that. The concern is that with high yield spreads widening, it implies a default level greater and above what the market thinks, and that could in itself be recessionary. For some who are very fearful they suggest this is the time bomb that is ticking and it will lead to the systemic banking problems that we saw in 2008.

Now, again, as an equity holder of course you look at this and say but actually some of these problems in the high yield world are very much isolated in the energy and commodity. Our personal view is those trends may start to improve next year. I would also suggest banks are now recapitalised. We had results from Lloyds Bank today, who actually are offering a special dividend to acknowledge that they have surplus capital. They have less leverage than they used to. And then maybe finally regulators and policymakers are perhaps more prepared. So there is a signal coming from the markets, but our central case is that doesn’t actually translate into recessionary factors in the real world.

ROBERT BAILEY: And Nick we’ll come on to talk in greater detail later on about the structure of the portfolio, the bond portfolio in this Fund, but how do you see the high yield market? I mean that’s quite a sort of a dramatic move in terms of spreads there.

NICK HAYES: Yes and as Jamie said it’s been a pretty difficult time for the last six to twelve months for US high yield. There’s a strong correlation with what’s going on in the commodity-related sector, because one of the areas that really had grown in the US high yield market is that energy and commodity-related area. So they had been big borrowers. There’s suddenly now, with the lower oil price and the bigger change around there, that you’ve seen lots of high yield companies get into trouble, spreads blown out. And it would make two points. First of all that this is quite isolated in that it’s becoming very much, you know, the really wide spreads are in that energy-related sector and they are pretty big numbers, but clearly you’re going to see defaults. That is being priced in and they’re already coming through. So the defaults have picked up backend of last year and early part of this year, and there’s almost a positive effect. No one likes you to having a high yield market that starts to default, but you’ll definitely see the peak in spreads six or nine months, being the widest point, about six or nine months before you see the peak in defaults. So what you need to see is defaults coming through. Then you need to see them pick up and by the time you get to the highest point of defaults in the high yield cycle, that would be far too late to buy through the cheapest point of US high yield.

So we think the fact that you’re seeing defaults coming through, that’s quite positive. And I guess for this Fund where we don’t invest in anything outside of government bonds, so that’s not a direct concern for us in owning global government bonds but clearly it’s a big macro driver, and what we’ve seen this year is, as people have been fearful of high yield, they’ve been flowing into a core interest rate sensitive assets. So US treasuries have been a big beneficiary of the flows out of some of the equity-like assets within fixed income.

ROBERT BAILEY: And Jamie, knowing that the Fund invests only in government bonds, doesn’t really invest at all in the high yields space, how do you factor all this in to the asset allocation within the Fund?

JAMIE HOOPER: Well, it’s very important the bond has a specific purpose within this portfolio. Within the managed balance proposition aligned with cash, it is to help defend the Fund in times of excess volatility. It’s coming back to what the end customer actually wants. And we have found over time that if we can identify pots of bonds which are not correlated, and this has worked very well in January in terms of moving in a different direction in the sovereign world to how equities have experienced. Secondly, of course, it gives us cash that we have. So that can act as firepower when markets sell off, as they often do in temporary fashion. And finally it makes us not a forced seller of equities in selling the silverware in times of trouble. But again I would come back to the simplicity of this as a hedge. People can understand it, they can observe it, and we’re very transparent in terms of how it works.


NICK HAYES: Bonds are doing what bonds do best in this portfolio, which is a) provide you with an asset class that should rally in a sort of risk-off environment. So when investors are looking for a ‘safe haven’ asset class, that’s what core government bonds are, and secondly they provide liquidity. There’s lots of concerns around fixed income liquidity, but we don’t really have concerns around government bond liquidity. And I think if you think about a balanced portfolio between equities and bonds, in the bond element you would certainly want interest rate sensitive assets rather than equity-like assets which might be high yield emerging markets or even some parts of the investment grade sector.

So that’s my remit; it’s very much buy interest rate sensitive assets and, as the previous chart showed, it’s an expensive asset class but it has the potential to get more expensive. And we’ve seen that in the early part of this year where yields have gone lower, so total returns have been very positive for core government bonds as the world has taken fright from equity and equity-like risk.

ROBERT BAILEY: OK. So Jamie drawing this back then to the Managed Balanced Fund and the equity portion of the portfolio, which is where you get your real outperformance from, what are you seeing in the corporate market? This slide talks about profits peaking. Is that your interpretation of how you see the market?

JAMIE HOOPER: Well, firstly we pick stocks in the index rather that an index of stocks and many of these charts we’re talking about are aggregates of levels, and these are driving some of the market concerns. Equally, this is a US chart of peak margins. Now, the adage is that America gets a cold and the rest of us sneeze with that. Having said that, we meet many companies where there is not doom and gloom, where they are delivering consistent profit growth and returns to shareholders. But why this is relevant is the market is concerned that unlike the UK and Europe where corporate still earn profits below previous highs. In the US it feels like their profits may have peaked. Their issues being revolving around a stronger dollar, revolving around tax loopholes having closed at the end of their refinancing to the lower interest rate world and also the ending of share buybacks, and this has been a theme of this market cycle. If you were to look to the right hand chart, again in aggregate rather than the individual regions but you can see earnings keep being downgraded.

So, if I go back to 2003 to 2007, prices went up as profits got upgraded. There was no rerating of the market. This time around profits have struggled to rise as the real economy has struggled to rise but risk assets have risen and it’s in part due to the liquidity stimulus that we’ve received. I would simply come back to this portfolio is about stock selection; it’s not about making big macro calls. It’s about empowering the regional managers in their carve-outs to buy good compounding companies and stick with them; albeit with a very adequate satisfactory and successful bond and cash hedge. So it’s all about stock picking in this sort
of environment.

ROBERT BAILEY: And in that stock picking environment, what’s the feedback you’re getting from individual companies, because it’s very easy to get wrapped up in worries about US interest rate rises and worries about Chinese growth, where for a lot of the companies you deal with I imagine there is as much interest in how the UK consumer’s behaving or how the UK building market’s behaving?

JAMIE HOOPER: And there are certainly areas of the market that are doing very well. I would say most management we see are both realistic and conservative. I mean they remember the credit crisis, and it’s still very fresh in people’s minds. But the equity market is reacting with volatility far greater we believe than the reported number suggests. Having said that, there are certain areas of the market where we observe problems and generally try to avoid them. I mean the mining and the commodities, we can come back to that again in a moment if you like, but they are going through an adjustment phase. There is surplus supply, there is the need for rights issues, there’s the need for dividend cuts. So there are problematical areas of the markets and there are dividend cuts, but we generally are going for quality companies with strong growth prospects, and so far we’ve managed to avoid some of those issues.

ROBERT BAILEY: And in terms of the rating of equities, you mentioned the forecast expectations, what are you seeing here?

JAMIE HOOPER: So this breaks down regionally equities. The grey bars represent the trailing price to earnings; the blue diamond represents the long- term median. Current numbers, the grey bars would have come down a little bit but the point remains valid that in an absolute sense equities have revalued probably to their long-term averages. Again, which makes stock selection in our desire to try and find undervalued growth even more important. If one gets in a relative valuation discussion now however, the chart on the right looks at the dividend yields, which again is represented by the grey bar, versus the respective sovereign bond yields, which are represented by the blue blocks, and again you can see that equities offer, as a real asset they offer surplus dividend growth. However, the caveat here, certain areas of the equity market are seeing
dividend cuts.

So, again, it’s about stock selection, meeting the companies where you think dividends will be preserved. But again, it comes back to whether you think equities are cheap or whether you think bonds are expensive. But we are still finding many good companies with many good prospects for years to come.

ROBERT BAILEY: So, in terms of your asset allocation, looking at this chart here, seeing you get a superior dividend yield2, albeit in that dividend cutting environment to bonds, how are you managing your allocation to the bonds and cash proportion of portfolio currently?

JAMIE HOOPER: Just to be very clear the construct to this fund has been very, very consistent over time: 75-85% of the Fund is in equities; 15-25% is in bonds and cash. So structurally, philosophically, we prefer equities. So it is a global equity product, with this bond and cash hedge. So you will not see us moving these weightings around too much. We like the bias towards equities and then we empower the regional managers to invest. And again, we can come to a slide later in the presentation which looks at the regional allocations. Again, we typically are around the benchmark. We don’t want this to be a big macro asset allocation call. What we want to do is empower the regional fund managers to buy good quality companies. That is, as you made reference to earlier, is where the alpha comes from.

ROBERT BAILEY: And you as one of those regional country managers in your role as co-manager responsible for the UK, talk us through your view of the UK market as a whole.

JAMIE HOOPER: So, maybe I would say this but we like the UK. We think there’s many cheap companies, or undervalued companies, with very good growth prospects adapting to global structural trends; however, many strategists don’t like the UK at the moment. We have an austerity programme; we have a large fiscal deficit; we have a large weighting to commodities, that until recently have been very poor performers; and of course there’s discussion which will bombard us now in terms of the media and certainly in terms of investment research is the potential outcome of the referendum in June later this year. So whilst we find many stock opportunities, tactically much of the market is opposed, we actually have an overweight to equities in the UK simply because we see better opportunities than perhaps many others would observe.

ROBERT BAILEY: And typically within your UK portfolio, do you have a bias to any particular sector or size? I mean you mentioned the oil and gas sector here, I mean how do you structure it?

JAMIE HOOPER: So, point one, we like consistent compounding growth. So that would point us to certain sectors philosophically. Secondly, whilst the commodity sectors may offer value, certainly for the contrarian, as I alluded to earlier, fundamentally they still have problems in terms of surplus supply, addressing their balance sheets and cutting their dividends. Their prospects may start to improve as the year progresses. But again, the way that we like to run money we need to observe some improvements in those trends. So the areas that we have more sympathy would be with support services. It’s a very heterogeneous sector, where it can provide an invaluable service with pricing power, low tangible assets, very clear accounting. We also like the pharmaceutical sector. We also like the technology, just by way of example.

ROBERT BAILEY: And the subject of Brexit, as you say, we’re certainly not the first people to talk about it and I suspect we won’t be the last to talk about it, does that weigh on your decision making?

JAMIE HOOPER: So, again, it’s back to the macro. We’ve spoken a lot about macro. It just informs us on the framework. We acknowledge that certain stocks may be exposed, should we leave the European Union. But certainly what we won’t we doing is adapting our portfolios pre-emptively looking for the binary outcome. You know, we’re not in the game of forecasting. As a house we have a view, probably similar to the bookmakers that actually the UK reforms and remains, but we’re certainly not positioning our portfolio based on that. So we have to be cognisant of which stocks may come under pressure.

So for example at the moment sterling has started to weaken quite significantly, I think it’s at a seven year low, to reflect the concerns if the UK were to depart. But again if you look at the construct of the UK component, certainly relative to peer groups, we have a much greater weighting to large caps, to overseas companies. They typically will be a beneficiary in terms of sterling weakness as they translate their overseas profits which would lead to upgrades.

ROBERT BAILEY: OK let’s talk about some of those individual stocks very briefly. You mentioned the sectors you like here. Give me one or two of the stocks that you really like.

JAMIE HOOPER: So we’ve represented the UK carve-out, as you’ve rightly say I manage that part of the portfolio specifically, but you could see this across all of our regions: a) we want to play structural trends and b) we like core compounding companies. So again, I’ve taken this away from sectors and thought more about thematics. And again, if you think about the 10 to 15 years, what has driven stocks? It’s not daily releases of news flow; there’s been so many calls about interest rate rises that have subsequently proved unfounded. It’s about understanding the internet. It’s about understanding mobile telephony, nanotechnology, discount retailing in the UK, shale oil and gas in the United States. So these are the thematics that are important.

Now I’ve highlighted some, not all of them here, and then around that represented some of the stocks that play to some of those themes. So let’s think about data. We have ARM and Micro Focus which are both technology companies but doing quite different things. ARM is trying to capture the use of embedded technology, the internet of things, servers, networks, and not simply our mobile phones and tablets. They are the world leader and have a tremendous growth trajectory ahead. Micro Focus meanwhile deals with legacy software issues. Where the rest of the market have departed, they are consolidating and providing very consistent and growing cash flows.

Alternatively, we have the London Stock Exchange which has recently announced a proposed merger with Deutsche Börse. Again a different way of looking at data, regulating data, but it is the provision of that data that’s very important. And then finally Worldpay which is about secure payments, whether it be through cash, whether it be through cheques, whether it will be over the phone, but increasingly whether it’ll be using your mobile phone, your watch or fobs, etc. And that’s all about safety and security. So the theme is data but many different ways of playing that.

ROBERT BAILEY: And one of the questions we’ve had relating to the UK proportion of portfolio is on size exposure; how do you position yourself relative to the All Share weighting?

JAMIE HOOPER: OK. So going back to the point, the UK needs to be consistent and, as I’ve said, it frees up risk for the other regional carve-outs. So we have a bias towards large caps. So typically 60-70% of the Fund will be towards large cap. When you mention large cap people often roll their eyes and think of supertankers, dull value traps. So again we need to be active. So many of the companies I’ve spoken about already, London Stock Exchange is a large cap, Worldpay, British Telecom which had good news today in terms of its regulatory backdrop. So the stocks I’ve listed here, again there would be a combination of FTSE 100 and mid-caps, but ultimately we’re just looking for consistent growing companies. As a thesis, we like proven winners, and we think they’re scarce attributes in this current low growth world.

ROBERT BAILEY: And, Nick, moving across and just looking at the fixed income proportion here, it’s about £120 million of the £940 million in the portfolio. How do you manage that in terms of your exposure? We mentioned just to government bonds, but talk to us through that.

NICK HAYES: So, as Jamie’s said, this is not an aggressive asset allocation in or out of the asset class. It’s about owning the asset class and trying to make the best out of what you have in the asset class. So I guess there’s a couple of key strategies. One is to be slightly underweight, sort of the benchmark duration on the overall view that the asset class is expensive, but it’s not ignoring the asset class because it does so well in a sort of risk-off type environment. Secondly, a slight preference for some European government bonds. This is not peripherals and not Italian or Spanish but core sort of northern European government bonds, which, even though they’re expensive, are still massive beneficiaries from central bank policy, whereby the ECB have started a QE programme and we expect that to continue for quite a while. And then thirdly, it’s a kind of curve position. So overweight very short-dated bonds, which clearly benefit from less volatility if you do get a rising government bond yield curve, but offsetting that by owning very long-dated assets, so looking for a sort of a flattening of various curves.

ROBERT BAILEY: OK and finally, and this ties in nicely with another question we’ve had Jamie, just in terms of your positioning. You mentioned earlier you don’t see this Fund as an asset allocation-type play. Talk us through where you’re positioned currently in the Fund and perhaps where you see that going over the next 12 months or so.

JAMIE HOOPER: Yes. So again just to clarify the virtue of this Fund over time has been about stock selection at the regional level with the adequacy of the hedge in times of volatility and trouble for equity. You know, in the ‘90s when we go back on occasion there was a call, there was zero-weighted in Japan and double weighted in the US, but that’s really the exception rather than the rule. It’s very much about the micro input, albeit understanding the larger macro framework. I mean as you look here at the allocation, really there aren’t large positions relative to the benchmark or to the peer group. As I said, the alpha comes through the stock selection. The largest overweight would come from the UK where a) we observe value because, as I’ve said, strategists have unloved the area but we think that will start the change; secondly because we observe some very good companies operating successfully on a global basis. But that historically is kind of the extremity of the tilts here.

So of the 75-85%, we’re currently towards the lower end of that proportion in equity, in part to reflect some of the macro concerns and some of the rerating. But one must never lose sight this is definitely a global equity bias product with the fixed interest and the cash as the hedge.

ROBERT BAILEY: And do you ever, I mean you’ve got Chisako Hardie managing the Japanese portion, Steve Kelly running the US proportion and so on and so forth. So do you ever get those fund managers coming to you saying, Jamie I think you should increase your allocation to Europe or to the US or Japan or whatever?

JAMIE HOOPER: By all means, the dialogue is tremendous. We meet regularly when I look at holdings that Steve might have in Apple or Facebook or some of the towers of business or Chisako might have in CYBERDYNE or Seven & I, these are companies we talk about a lot because we’re trying to think laterally and the impact on our companies is very much as theirs. Secondly, we do empower them regionally to invest to the best of their ability. And certainly, there is this call for capital. If someone sees opportunities in their markets then come forward and we will allocate the capital accordingly. But again it’s not losing sight of the purpose of this Fund which is for the cautious investor who doesn’t want too much volatility in their outcomes. But we believe there’s still definitely alpha to be generated through equities at the regional level.

ROBERT BAILEY: OK great. Well, thank you very much Jamie and thank you very much Nick, and thank you for joining us. As always, we’re grateful to hear any feedback or any further questions you have on this particular fund. We’ll answer those as we can. But for now, Jamie Hooper, Nick Hayes, thank you very much for joining us, and thank you for joining us as well.

1 refers to slide 2 in the webcast presentation. Past performance is not a guide to future performance.
2 refers to slide 9 in webcast presentation Yields are not guaranteed and will vary in future.


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