- Themes in focus include cyber security, healthcare, robotics and consumer technology
- Political instability and changing international relations give rise to greater demand for security and defence products
- Outside ‘big pharma’ are many businesses with strong growth models in areas such as hearing aids and drug discovery
- Under the new administration US companies will likely substitute cheap foreign labour with more expensive US labour and high levels of automation
David Jane, manager of Miton’s multi-asset fund range comments:
“It has been a rip roaring few months for investors in the new paradigm of rising inflation and stronger growth. While we’re comfortable that the data is basically supportive of these new trends, we also think a portfolio shouldn’t be over exposed to a single factor. At times when one feature of our portfolios has contributed very strongly, we tend to increase our diversification. This leads us to consider some of the less macro-exposed themes that we follow as potential ways to reduce exposure to this single powerful trend.
“When looking to diversify a portfolio, it doesn’t pay to buy the opposite of what you like, you need to buy something complementary. By this we mean something that benefits from a different factor rather than benefiting from the absence of the factor you own elsewhere.
“Among our longer term themes, those that look attractive to us at present are those that didn’t benefit particularly from the ‘lower for longer’ environment. To complement our existing holdings we also want to be adding to those which are not necessarily beneficiaries of strong economic growth, where we are exposed heavily already.
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“We identified our global security theme as a good one for the current market conditions. The politically unstable environment and changing nature of international relations gives rise to greater demand for security and defence products. Cyber security has been a particular recent addition as defence spending has shifted from traditional armaments towards defending against cyber-attack. Additionally, this theme can benefit from the Trump administration’s increased focus on military spending and the desire for other members of the democratic world to carry a more equal share of the costs.
“Another theme which is attractive is our healthcare growth theme. An ageing population will lead to increasing need for healthcare. However, the big, mature drug companies have been huge beneficiaries of falling interest rates and are in the frontline for increased price regulation. Outside ‘big pharma’, there are many businesses with strong growth models in areas such as hearing aids, drug discovery and so on, which will see demand growth and are not in regulators’ sights. These healthcare growth companies are now our focus.
“Also timely is our industrial technology and robotics theme. This area has not been as strong as it might have been as capital investment has lagged, but the twin drivers of increased economic demand and reshoring may now drive greater growth in this area. US companies, under pressure from the new administration to stop moving jobs offshore, will likely substitute cheap, foreign labour with more expensive US labour and high levels of automation. This trend of substituting technology for labour, which is already entrenched in Asia, is likely to hold also in Europe and the US, in an accelerating growth environment.
“Our consumer technology theme comprises many of the big internet companies worldwide. While the US names are not necessarily favoured by the Trump administration they are beneficiaries of a stronger economy. Our bigger positions are in the international names, particularly in Asia, that benefit from strong growth and lack the risk of a less benign US regulatory regime. This rapid growth sector has been held back by the rises in bond yields in the short term, but the long term growth characteristics should prevail in the medium term.
“In summary, our process of controlling risk guides us to diversify at times when a single driver has dominated returns. Having benefited well from the switch to a reflationary macro environment, in the near term, we have been trimming some of these positions and switching into our long term themes, in order to increase the number of potential drivers of future returns.”