Equities 'Attractive Enough to Warrant Optimism'

Paul Sedgwick, chief investment officer of Frank Investments, was featured in the December 2014 Bloomberg family office report. Please find below the article and a link to the full Bloomberg report on page 11. 

Equities 'Attractive Enough to Warrant Optimism': Frank Investments' Sedgwick

The conundrum facing investors again in 2015 is what asset class is going to give the best risk-adjusted return. 

Some take the view that bonds offer no income and are expensive when compared with history, unless one takes a very bleak view of the global economic outlook.

Others say stock valuations, driven by central banks’ ultra-loose monetary policies, have risen to unsustainable levels, particularly in the U.S. They believe that as the Federal Reserve removes this stimulus, risk assets will no longer have the artificial crutch they need and are thus vulnerable, a view expressed recently by the Bank of International Settlements.

We believe that although equity valuations have rerated substantially in the past couple of years, they remain attractive enough to warrant optimism, when compared with both history and other asset prices.

Historically, equity markets tend not to crash when governments and central bankers are pursuing pro-growth strategies, as is currently the case. When one stands back and looks at the world today, there are many reasons to be worried — the euro area economy, geopolitical tensions and emerging market growth are at top of the list. Indeed, concerns many had that central bank policies would lead to rampant inflation have now turned more to worries that deflationary pressures could return. The silver lining is that central banks are accommodative, and will remain so for a while.

As a result, we expect equities to make up 70 percent of our portfolio next year, as it has been during the past few years.

The balance of the portfolio is held in cash and corporate bonds with maturities extending approximately five years. We do not invest in structured products or use derivatives as a form of leverage.

Frank Investments’ philosophy is based around diversification, global reach and sustainable dividend policies. Hence, our philosophy going into 2015 is very much to stick with these type of companies.

Examples include Reckitt Benckiser Plc, Melrose Plc and Vodafone Plc in the U.K., and in Siemens AG and Sanofi in continental Europe.

We avoid the highly operationally geared sectors, such as airlines and steel manufacturers. Our investment philosophy is that these are sectors you rent during periods of strong economic growth, which is not the case at present, and not buy for the long term.

We tend not to invest directly in emerging markets as it exposes the portfolio to greater currency and political risk. Liquidity can also be an issue as can poor corporate governance. Instead, we get our emerging market exposure from companies with an emerging market presence, but whose foundations are in the developed market. Prime examples would be Standard Chartered Plc and Procter and Gamble Co. The downside is you don’t get the gearing from a direct investment into the emerging market itself.

Frank Investments was established in 2005 in the style of a family office. It offers its clients the opportunity to invest alongside the founder's portfolio.

Posted on December 4, 2014 .