Equities will continue to drive Euro-denominated dynamic asset allocation opportunities in 2014, says Christopher Mahon (pictured), investment manager, Baring Euro Dynamic Asset Allocation Fund…
Looking at 2014, equities are the right place to be at this point in the cycle due to ongoing accommodative monetary policy in most countries. Bonds, meanwhile, are likely to have a dreary time, in our view. Yields in the west are just not high enough to attract serious flows and there may well still be steady outflows from emerging market debt after the boom of recent years.
With regards to Europe and the Eurozone, we certainly think that policymakers are far less likely to push the austerity agenda than they were two years ago. In this scenario, the outlook for the next 12-18 months is more positive.”
Having just celebrated its first anniversary in March this year, the Baring Euro Dynamic Asset Allocation Fund follows the same strategy as other Barings’ Multi Asset Funds. The Fund aims to deliver long-term equity-like returns for European investors – defined as 3 month EURIBOR +3% – within 70% of predicted equity market volatility, achieving this by dynamically allocating across a range of global asset classes including equities, fixed income, currencies and cash. The manager takes a global perspective but ensures that at least 50% of exposure is in Euros.
In terms of currencies, the Baring Euro Dynamic Asset Allocation Fund retains a good degree of exposure to the US dollar. For the Euro, Barings believe that the picture is still clouded by the developments in France, where the economy looks as if it is slumping back into recession, and in Italy.
With the European Central Bank stress tests due in 2015, banks are likely to have to raise very large amounts of capital to help offset even greater write-offs on non-performing loans. In the meantime, they are still shedding assets, restricting credit to the business and personal sector and keeping credit spreads high. This suggests to Barings that while the fiscal squeeze may well be minimal in 2014, European growth will remain anaemic, at an average of about 1% across the continent. While these downsides are offset somewhat by the strength in core European countries and the broader global economy, Barings believes its US dollar position will also help to cushion the Fund against any weakness arising from additional problems in Europe.
Overall, while we see continued support for asset prices in 2014, there are still risks to the outlook. Although we expect equities to outperform bonds as the economic recovery continues, volatility is likely to increase. We prefer European government bonds to their US counterparts as we expect a lower growth environment in Europe that will be more beneficial for government bonds in this area. In terms of emerging markets, we think that the volatility seen in 2014 will continue, and while opportunities do remain, investors will need to be much more selective.
At Barings, we believe that a multi asset investment approach can deliver the long-term returns associated with equity markets but with considerably less risk. We believe that the critical skill set in achieving this is dynamic asset allocation, and a willingness to move between different asset classes at different times, ranging from equities and bonds to carefully selected alternatives such as gold and property.
The Euro Dynamic Asset Allocation Fund is a UCITS Fund domiciled in Ireland. The minimum investment for the retail share class is EUR3,500 with an annual management fee of 1.25%. A share class for institutional investors is also available. The investment objective of the Fund is to generate a total return consisting of capital and income appreciation which exceeds European cash rates over the medium to long term.