While the first concern of institutional investors may be making sure their liquidity funds are safe and secure, they should not ignore longer term investment trends, despite the current “ferocious economic climate,” believes CCLA’s head of investments James Bevan, one of Europe’s best informed institutional experts.
Institutions with a strategic long-term asset allocation should not be panicked into taking snap decisions, said Mr Bevan, who oversees assets worth £5bn (€6.42bn) for clients including the Central Board of Finance for the Church of England. Unlike more commercially-driven groups, CCLA is wholly owned by its charity client base.
Long-term opportunities may present themselves in fixed income securities such as bank preference shares. “The first area beyond cash is credit,” said Mr Bevan, who expects more downside in equity markets.
“You cannot have a sustained equity market rally without first experiencing a credit market rally,” he explained.
But equities should not be ignored, with traditional defensive growth stocks such as energy supplier BG, pest control operator Rentokil and self-style “health and nutrition” players Nestlé and Danone proving potentially attractive. And while equity prices may be depressed, investors can benefit from the free cash flow and dividend yield which well- chosen companies can provide.
Whereas Mr Bevan has always recommended clients should pursue diversified strategies, he questions whether all diversification is productive, and warns clients not to move into highly leveraged areas.
“A lot of people bought private equity to diversify away from quoted assets, but much of private equity is now based on financial engineering, not best business management,” said Mr Bevan.
In recent times, buyout groups have been taking over companies using financial leverage and then restructuring the balance sheet, rather than changing the fundamental business model. He warned investors to expect some blowouts in private equity, with a forthcoming “separation of men from boys.”
Property, another area into which institutions have diversified, can also be a dangerous asset to hold when the cost of debt increases, while asset values are written down, though it is slightly more predictable than the buyout industry because properties can be regularly valued, unlike private equity.
Investors moving into hedge funds have often done so with the belief that they are totally uncorrelated with other markets, but this can be a false premise, said Mr Bevan, whose research shows that the performance of many hedge funds is linked to their underlying equity markets.
