Redwood is also favourable
towards the Indian
economy, which has
ploughed through the
global recession relatively
untroubled because it has
kept such an accommodating
monetary policy.
However, the team has less
exposure to Latin America
or emerging Europe equities,
though it has used a
general emerging market
ETF which replicates the
leading indices with a fair
weighting to resourcedriven
Brazil.
Aside from generic
global indices, discretionary
portfolios have no specific
individual exposure to
developed markets and
Redwood is particularly
scathing on the domestic
financial system. He sees
the UK as the most dangerously
exposed of the major
economies to the global
recession and, relative to
the size of the economy,
has a more sizeable banking
crisis than the US which
he believes is “muddling
through” its problems.
He says: “If you look at
the past 10 years, it is pretty
shocking to discover that
over that decade as a whole
you made practically no
money in British and US
equities. You were better
off with money on deposit
whereas you made money
in emerging markets and
Asian markets.
“Of course, when you
see that situation, you
should ask yourself does
that mean that Asian and
emerging markets are overvalued
and are the US and
the UK cheap? I do not
think it does. It is not just a
10-year phenomenon, it is
more like Japan from 1950
to 1990 when investment
managers in Britain had
surprisingly little in Japan
and decade after decade it
grew and outperformed
the West.”
l Bullish on property
ETF SELECTION PROCESS
Investors bullish on emerging
markets are invariably
bullish on the long-term
prospects for the commodities
which underpin the
continued rapid urbanisation
of these regions.
Redwood is no different
though, in keeping with
his firm’s cautious approach
to investment, he buys
ETFs linked to general
commodity indices rather
than taking direct exposure
to resources through
exchange-traded commodities
(ETCs).
Redwood is becoming
more bullish on property,
particularly on Asian property,
which he believes is
recovering at a much faster
“We have a couple of analysts working on ETFs all the time and we
publish an annual book setting out how we see ETFs. We are one of
the few independents that cover them as most available information
comes from providers themselves.
“We apply a series of tests of the ETFs dependent upon whether
they use a replication or synthetic model. If replication is used then
in some ways there is less risk involved, but maybe more tracking
error. If it is a synthetic product, then we have to make sure we like
the counterparties and that the synthetic element is quite small and
the underlying portfolio of assets is a reasonable one. We use both
replication and synthetic products, bearing in mind that a proper ETF
cannot have less than 90% of money invested in shares.
“We then look at how much money is in the fund, how it has
performed, whether it has a track record and tracking error after
costs, which is more crucial than the fee. Some of the better ETFs,
now in the largest and most liquid markets, have got the tracking
error after costs near enough down to nothing.”
rate than in the UK, especially
in Hong Kong.
However, as with the
team’s commodity exposure,
he again prefers to
access this story through
ETFs that give a spread of
investments into Reits.
He remarks: “One of the
lessons in 2008 for investment
managers is you do
not diversify your portfolio
by having private equity,
commodities, property and
equity in a condition where
you have a credit crunch
and monetary collapse.
“They all go down
together because they are
all correlated to the same
thing – easy money. If you
switch off the easy money,
then they all have their
problems and the more
heavily you leverage funds,
the worse the problems are
as we saw with quite a lot
of private equity funds.”
On this tract, the team’s
discretionary portfolios
have limited exposure to
private equity given the
scarcity of finance in the
UK private sector, meaning
firms will not be able to
earn the superior returns of
the period up to 2007
because the money is no
longer available to gear
deals as strongly as before.
l Hedge fund debate
Hedge funds have also
been under debate in the
team’s meetings and,
although the asset class
has not been ruled out,
there remains a problem
with trying to accommodate
these fund managers
given that they more than
often operate with a 2%
fee and demand one-fifth
of profits.
In common with the
industry at large, Evercore
Pan-Asset has benefited
this year from the outstanding
value offered by
corporate bonds, which
ASSET ALLOCATOR EVERCORE PAN-ASSET
have presented attractive
yields in a low interest,
low income environment.
l Real value of gilts
Redwood concedes that
having a high conviction in
bonds is atypical in discretionary
portfolios, given
that in normalised markets
these assets do not usually
make sense for charity or
pension funds.
These institutions need
assets to go up in line with
inflation because they need
to pay future wages or
pensions based on future
wages, and fixed income
investments have traditionally
found it difficult to
meet these needs.
While many industry
figures have now called an
end to the run on corporate
bonds, Redwood has
yet to cut his clients’ exposure
to the asset class.
He stresses that 6% plus
yield is still attractive in
current conditions, and
adds that corporates offer a
2-3% yield advantage over
government bonds. He
believes it is hard to determine
the real value of gilts,
because the Bank of
England is such a large
buyer of these assets
(quantitative easing is
expected to rise to around
£200bn).
“I would like to see how
the market settles down in
government bonds after
that buyer is removed. We
suspect valuations will be
lower and yields higher,”
he says.
“Could sterling corporate
bonds also fall in price as
well? We think they are less
exposed because the yield
advantage in corporate
bonds over government
bonds is still quite high.
There is still a prospect of
earning your income without
damaging capital in a
corporate bond.”
SUMMARY
Evercore Pan-Asset held 100%
in cash during 2008, though
has since made large moves
into Asian equities and fixed
income.
The firm prefers to use
ETFs over active funds for
discretionary clients, primarily
because they are cheaper and
less complex.
The team is becoming more
bullish on property, though it
prefers to allocate to the faster
recovering Asian market than
to UK and Europe.
“
If you look at the
past 10 years, it is
pretty shocking to
discover that over that
decade as a whole
you made practically
no money in British
and US equities. You
were better off with
money on deposit
whereas you made
money in emerging
markets and Asian
markets
”
JANUARY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
33
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