It seems inevitable 2016 will be defined as a momentous year, both politically and economically. It will surely go down as the most explosive 12 months since 2008 and the tribulations of the global financial crisis.
Brexit, Trump and Renzi’s defeat in the Italian referendum have by and large been side-stepped by the markets, but the seismic shift in the political landscape has ushered in a new era of reflation, fiscal dominance and the possibility of a looming recession, according to JP Morgan’s Michael Schoenhaut.
“We don’t necessarily see recent events as causing a sudden, massive change to the world but we do see a meaningful tilt to a much greater likelihood of a reflation story from the ‘lower for longer’, low-growth, low-inflation environment, where recession was pretty unlikely,” he says.
Despite downplaying the prevailing sentiment of political uncertainty, New York-based Schoenhaut, a co-manager of JP Morgan Asset Management’s flagship Global Income Fund, adds that events in 2016 will lead markets to “price in stronger growth” for next year.
This will be largely driven by the president-elect Donald Trump’s promise to increase infrastructure spending by $100bn while cutting corporate and individual tax by $400bn, he says.
Tailored to fit
Schoenhaut has jointly run the fund, which has a US, Hong Kong and a Luxembourg Sicav version, with his London counterpart Talib Sheikh since the original was launched in 2007.
The investment style is a bespoke one, and the pair use stock and bond pickers across JP Morgan to build sub-portfolios, known as ‘customised income-orientated sleeves’.
Pieced together like a jigsaw, the sleeves are assembled to create a US-focused high yield-weighted portfolio aimed at “delivering an attractive yield and income source to investors while maintaining prospects for capital appreciation”, says Schoenhaut.
Asset allocation takes up the bulk of the duo’s time, which is understandable given that between them Schoenhaut and Sheikh, joint managing directors of JP Morgan’s multi-asset team, have nearly 40 years of experience in the sector.
A split of the pack
After joining the asset manager in the late nineties, the pair have become stalwarts of its multi-asset division, having worked in the unit since its inception in 2004.
Sheikh reveals that the €16bn Ucits fund has a volatility profile in line with a traditional 60/40 balanced portfolio. Just over a third (36%) of the portfolio in is high yield while two-thirds (65%) is channelled into the US.
“We are now seven years into what has been an insatiable bull market in yield assets around the globe, so it would seem crazy if some parts of that market were not overvalued,” Sheikh says.
Given the volatility of equity markets during the past year, the performance has not been too bad. By the end of October, the euro units of the Sicav posted a 4.54% growth for the year to date, representing an average dividend yield of 5.3%. The annualised return since launch stands at 9.26%.
In 2015, performance turned negative, tanking to -0.6%, which Sheikh puts down to the poor performance of US financials and limited exposure in Europe.
“We spent the first five years of this portfolio selling fixed income-type assets to buy equity-type assets.
“Broadly, that was the right thing to do but last year it wasn’t necessarily just the equities we bought, it was the type of equities. We were a bit low on Europe, and clearly financials didn’t work particularly well.
“We didn’t really alter positions hugely off the back of that. That financial positioning did not work very well last year and Europe was slightly disappointing,” he says.
