Alex Ralph, manager of the £1.2bn Artemis High Income Fund, explains why she remains concerned in regards to the outlook for the UK market and has turned her attention to Europe instead.
How did you position the fund ahead of the General Election in June and what is your outlook for the UK market?
Ahead of the General Election we took a (long) position in the US dollar. That's because we thought markets were too sanguine in their expectation of a hung parliament.
On the night of the election, at 10pm following the exit poll, we took a further dollar position. That now accounts for about 7% of the fund.
We previously had (and still have) a short position in Treasuries. It is pretty small because we are not a strategic bond fund, so we are not trying to move strategically. But this position gives the fund a hedge against the periods of flux that we see ahead for the UK economy.
In terms of the outlook for the UK, we are concerned. Inflation is taking off more in the UK than it is elsewhere, and the UK could enter a period of very low growth. If that continues, the country could even move to recession.
This is not our base case, but we do believe growth will be much slower in the UK than in Europe and the rest of the world. Real wage growth will ultimately fall, and even a soft Brexit will, we believe, cost the UK. So we are not particularly positive about the outlook for the UK.
How are you positioning the fund in terms of Europe and quantitative easing?
In Europe, we think they will start to taper QE at the end of Q4 this year. But unlike in the US in 2013, it has been pretty well flagged so it won't be such a shock. We do foresee a rise in Bunds up until the year-end; and as a result we have kept duration short on the fund.
But we are looking at the numbers coming out of Europe and believe the consumer is in a much better position relative to the UK. We think that will continue for at least the next six months; and as a result we are maintaining our exposure to the European consumer.
Just over 40% of the fund is invested in UK and European financials. Why?
Because the fund is very much about getting the right level of yield for the credit risk we take on. In the financials space, investors can get a much better pick-up in yield than they can in other sectors.
In Europe, we are quite optimistic on the economy overall compared to the market. So combined with the fact the fund is pretty short on duration, we are comfortable with the risk we are taking on through both the financial sector and the European consumer.
Click here to read more about how the Artemis High Income fund manager assembles a diversified portfolio with a low-to-medium risk profile that aims to navigate key market volatility