Ditch the models, on the road

In the first of his dispatches from the regions, our head of multi-asset investments, David Coombs, explains why he looks forward to the banter with IFAs. He also shares some of the pain that goes into getting out to see them.

Pile of old keyboards and computer parts

By David Coombs

Every January I pack a (much too small) suitcase and step out to test the terrible infrastructure of our fine country. Lately, I get treated to a few trips to the Continent too – although they are much less glamorous than you’d think. The reason I punish myself this way is to update you good people on how we will be investing your clients’ money in the year ahead. And so, from Aberdeen to Marbella, I have endured many modes of transport and differing levels of accommodation over the past week and a half.  But the fantastic discussions I’ve had with many of you have made it worth it.

Last week, I presented our 2019 outlook, Ditch the models, to about 30 advisers crammed into the D’Oyly Carte Room of the Savoy Grill on The Strand and then 25 advisers at Colchester United’s stadium. Somehow we got stuck in the lift.

You never know what’s going to hit you. I managed to rip my suit on the way to Norwich – I didn’t realise at first (it had been an early start for a breakfast presentation). The first guests to arrive were met with the unusual sight of three of Rathbones’ finest looking at my rear to judge if I was decent! The answer? Just about. But no sudden movements. Unfortunately, the centre didn’t hold. By lunchtime (now in Newmarket) the trousers were finished. So it was jeans for the rest of the presentations that week. By the end of it I felt exactly like a hedge fund manager.

On Tuesday I was asked the most challenging question so far: Would I invest in Nando’s (apparently they do chicken)? On Wednesday, I debated whether my views on China were behind the times. I really enjoy all this, even dealing with the odd heckler. These meetings/seminars give me a chance to explain a few of our newer investment ideas, some of which fly in the face of consensus.

We are barely through just a third of our seminars, but, so far, my view on China has been the most contentious. Recent data have clearly brought out the bears and, in the short term of course, negative sentiment may indeed hang over the market. My thoughts are more long term, however.

Whatever the growth rate, what’s indisputable is the size of the Chinese economy. That and the sheer level of demand from Chinese consumers. Over the medium to long term we should be investing in this market, either directly, through first-class local companies, or to Western companies that understand China. What I mean by that are those that design, promote and distribute goods or services into China specifically aimed at local tastes and culture. Seems obvious – it’s not! There have been so many poorly executed forays by Western giants that we’ve lost count.

We question whether it make sense for UK investors to virtually ignore China when building portfolios. Within equities, most British investment models allocate to a number of regions: UK, Europe ex-UK, US, Japan, Asia ex-Japan and emerging markets (of which China is underrepresented relative to its clout). Why? Who told us we had to do it this way? Surely, given the size of the Chinese economy and the potential growth there, we should at least add it as a seventh region? It’s vying to be the largest economy in the world!

At the moment, China gets lost in the emerging markets allocation. This seems out of date to us. Spending hours debating whether to switch 1% from the US to Europe due to short-term valuations, while ignoring one of the biggest swing factors in global GDP growth cannot be right.

So we think allocating 10% of the equity weighting to China as a neutral position makes sense for a strategy with a 10-year time horizon. I suspect the most controversial aspect of this suggestion will be that in 10 years’ time it will be seen to be hopelessly timid.

Next week, London and Cascais (Portugal); Scotland the week after. Hopefully more stories to come. And no, I won’t be investing in Nando’s. Have a walk down your local high street and count the number of chicken places …

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