What to do when central banks pull the rug away...

Tighter central bank policy will remove a tailwind for equities in place for the past 6-7 years, but Ian Heslop, head of global equities at Old Mutual, knows how to keep outperforming.

Do you think systematic investing can completely replace traditional stock picking?

I think there is a place for all types of stock selection within a portfolio.  So we have a blend of different types, different themes, different ways of predicting stock returns, which we use together.  And I think that's how the market should work as well.  So systematic or non-discretionary, so rules based investment alongside discretionary fund management, they all have a place within markets.

Do you consider the US market expensive?  Is it right to invest in Value (i.e., cheaper stocks) right now?

I think the interesting thing about the US market at the moment is that you're paying for earnings growth, that you're not getting elsewhere in other parts of the world.  US markets are not cheap, relative to either history, or current valuations certainly stack up in what we would normally expect the US market to trade.

But I think you have to be a little bit cautious in relation to what you use to predict stock returns and outperform that index, irrespective of whether or not that index is cheap or expensive.  So we would suggest explicitly that the environment is required to be in the right position for expensive stocks to underperform cheap stocks.  And the ability for our portfolio to navigate through those types of environments, irrespective of how expensive or cheap the actual market is, is how we've been able to outperform for the length that we have.

Have the odds of an equity market sell-off increased, and should investors hold more cash than usual to exploit a downturn, or are there other ways of investing that can reduce volatility?

Equity markets aren't cheap, but what you're actually paying for is earnings growth.  Now the issues that we have at the moment is that central banks, particularly the Fed, are starting to change their policy.  And the kind of tailwind that we've had to equity returns over the past six or seven years is probably not going to be present over the next two or three years.  So we all have to take that into account.

Our view is that the best way to deal with that again is to diversify the types of stocks that you're holding within an equity portfolio, to reduce the volatility of that portfolio relative to the index, and have a level of consistency that means you will generally outperform that index going forward.

What type of investors are usually interested in your funds?

I think you can kind of bracket the investor group that we have broadly into two.  The first are investors who recognise that the way that we run money leads to a level of stability.  So they will hold us as the core exposure that they will have to say Global Equities or North America or Asia Pacific.  

Another part of our investor base recognised that we do something genuinely different.  We don't invest in the way that many other fund managers will invest.  We have broader numbers of stocks, [we enlighted to] diversify across styles as we've talked about.  And that leads to a return that looks different, it happens at different times, and the opportunity is that we can sit alongside some of the more concentrated fund managers, and diversify their returns.  So the overall returns to the investor is better risk adjusted.

This is the transcript of a video filmed on 5 June 2018. To watch the original video, please click here.

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