Citywire A-rated equity income manager Jesper Madsen has cautioned investors against piling into so-called stable companies.
Speaking to Citywire Global, Madsen said he has sought to hedge his own fund, the Matthews Asia – Asia Dividend fund, against potential upside surprises by adding to minor holdings in cyclical stocks.
This has seen him seek to counter-balance his exposure to defensive sectors such as consumer staples, where he has an 11.6% overweight, by adding some money at the margins into financials, which makes up 23% of the fund.
‘Buying what seems sustainable today but paying over valuation could come back to haunt investors,’ said Madsen. ‘Investors that are blindly pursuing investments into what is perceived to be stable companies may now run the risk of overpaying.’
‘In some cases we are probably early in terms of taking up this cyclical exposure but should inflation rise and interest rates start moving up then some of these more bond-like exposures could take a knock.’
Madsen, who first indicated a need to move more towards ‘semi-cyclical’ companies at the end of 2012, said the Asian consumption story remains a strong driver but there are cyclical names with valuations which are too good to ignore.
‘We have been looking for and investing in companies that are more exposed to the economic cycle,' he said.
'This is because these companies are trading at cheap valuations both in relation to other sectors such as consumer staples and healthcare companies, but also when compared to their own historical valuation range.’
‘The market place is correctly pointing out that many of these more cyclical businesses are facing pressures over the next 12 months or so, but we are looking at these companies with a longer term view to deliver not just dividend yields today, but dividend growth over longer periods as well.’
Discussing his Japanese exposure, which is currently a 16.6% underweight compared to the fund’s benchmark, Madsen said he remains cautious on the country’s outlook.
One key factor, Madsen said, will be when corporations within the country begin to believe the old adage that this time it is definitely different for Japan.
‘Maybe the initial domestic support has been subdued but this is a place that had a pretty hefty bubble in the 1980s,’ he said.
‘The impact will get more recognised if people believe that they need to be in equities and don’t want to miss out on further rallies. That would be an interesting development if Japanese householders were now starting to look at asset allocation and equities.’
The Matthews Asia Fds – Asia Dividend strategy has returned 21.08% in US dollar terms in the 25 months since its launch. This compares to its Citywire benchmark, the MSCI AC Asia Pacific TR USD, which rose 9.07% over the same time period.