Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Brooks Macdonald's Jon Gumpel.
Hello, Jon.
Jonathan Gumpel: Hi, Emma.
Wall: So, we're having a look at markets at the moment and I'll be honest, I am beginning to feel a little bit nervous because valuations are looking stressed. We met a couple of weeks ago and you drew some alarming comparisons with today's market situation and 2007, didn't you?
Gumpel: Yes. I mean, I think you can draw many parallels, both with 2007, with 1999, some with 1987. In fact, as time goes on, you're gradually able to tick up the numbers. But with volatility so low, debt levels so high, valuations so high, I mean, those are probably the main three that you need for 2007.
I think the one difference is that, obviously, the banks are in better shape. They are not the keg with the lit fuse waiting towards them. But probably the big difference now is that instead of it being developed world banking system, perhaps it's emerging world banking system and in particular, China. So, yes, I mean, our views are simply that certainty is reducing, volatility exceptionally low and prices high, it's probably not a time to take too many risks out there.
Wall: And as the market goes on and on, I suppose you like it less and less. But of course, as a fund manager, you are paid to be investors. And so, there are choices you have to make about where to put investors' money. So, where are you putting investors' money?
Gumpel: Yes. I mean, I think the selection for us increasingly becomes trying to find a range of the least worst investments and to really look for assets that give us a degree of an each-way-bet, a degree of protection on the downside but scope for optionality on the upside so that if markets do carry on, we are able to at least participate.
So, I think, in terms of overall equity exposure, that's down. I mean, we never have very much, but what we have, we've pulled down. We're probably overall net short on the U.S. equity market for the first time. The only equity markets we can really see much point in participating in are Europe to a lesser extent just based on economic upswing, but again, you do have the twin powder kegs of Greece and Italy sitting there.
We may have jumped one or two hurdles over there, but I think possibly there maybe more. But Japan – I mean, Japan seems to us really the best each-way-bet because it's the least expensive market on a whole range of measures but also probably the most exposed to cyclical upswing if there is one. So, I think that of the equity markets Japan is probably our sole primary exposure. We've got indirect exposures to a range of others.
Wall: And I suppose that's a good point to make. As an absolutely return fund manager you do have a number of levers at your disposal which can help limit the downside as and when it comes?
Gumpel: Absolutely. I mean, part of it – I mean, a lot of the classic opportunities for transitioning, moving money from risk assets to defensive assets, that game is probably over because with bond valuations as they are you actually have to be a little bit more thoughtful about where you invest now.
So, we've probably – because of the risks in the primary bond market we've increased our exposure to convertibles. We see convertibles as again giving us that great risk/reward each-way-bet. We also have increased our exposure to real assets. We think – so we got some gold. That's probably a monetary asset in a sense rather than an inflationary asset.
But if they have to go Weimar with the U.S. weakening, then gold will do well. But just inflation-protected assets are probably a good place to sit in for the short to medium term.
Wall: Jon, thank you very much.
Gumpel: Great. Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
