Pictet's Shaniel Ramjee is focusing on financials in the group's Multi Asset Portfolio on the grounds the sector is most likely to benefit from rising bond yields, while avoiding "anything that looks like a bond".
Financials are one of the main themes in the £174m fund's equity component, comprising 10.9% of the portfolio, alongside mining, energy, emerging markets and Japan, with the "very strong position in financials" spanning the US, Europe and Japan.
"Japanese financials (2.8%) are one of our strongest ideas as bond yields start to rise and inflation - even in Japan - starts to rise," Ramjee said.
"We see a strong reason for Japanese banks, especially the mega banks in Tokyo, to outperform the Japanese market. We like Japan and we are focusing on the financial market."
He added he still thinks mining (5.4%) is "an interesting place to be", with companies' free cashflow "phenomenal" relative to their history.
"We are now getting free cashflow of about 8% or 9%, with a dividend yield of about 6%, for a cyclical sector that is really interesting for us," he said.
"We have been positive on energy for eight months and while we are exposed to oil in our alternatives bucket (which represents 8% of the fund), we are also allocating to energy equities, which have fallen dramatically on a relative basis over recent years but are now starting to pick up.
"This is where we see a real return in an asset that provides a good dividend but is cyclical in nature."
Ramjee said the team generally prefers cyclical sectors as the defensive areas - such as utilities, telecoms, consumer staples and healthcare - are the most leveraged.
"Companies that are releveraging are seen to be the safe ones paying out dividends. Equity income has been the biggest selling strategy for the past few years.
"But in a period of rising rates do you want to be exposed to the most leveraged companies? They are the most dangerous to be exposed to. We want to be in cyclical, less leveraged companies that are more geared to economic growth," he added.
The manager said fixed income is "a difficult place to be" and as such favours US inflation-linked bonds (14.8%), where "at the long end you are getting paid about 1% real, which is unheard of over the last few years".
"Our credit now is in convertibles," he added, an 8% weighting. "It is the only area we will look to have credit in the portfolio. We do not want anything that looks like a bond."
On a regional basis, Ramjee is most cautious on the US and developed markets, which he says are "starting to bubble up".
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