Cole and Ramjee, who joined Pictet from Baring Asset management last year, have serious concerns over earnings expectations and brought their equities allocation down to as low as 18% last month before bumping it up slightly.
“Focusing on what central banks do has become great script for journalists and others but for us thinking about risk premia and what is discounted in terms of equities markets, it’s a different ball game,” said Cole.
“The world has become more fixed income orientated,” he continued. “You have got a yield curve and everyone understands that if the government moves the three month rate you can figure out what the rest of the curve will look like.”
“We are not as bearish about bonds as many,” Cole said. “Our macroeconomic view suggests that inflationary pressures are still some way off but at the moment we see earnings expectations are too high and therefore equities are vulnerable. My view is that this is the most important issue in markets for the rest of 2015, not whether the Fed puts interest rates up or not,” he added.
With 75% of the portfolio needing a home away from stocks, Cole and Ramjee have had to look across the whole fixed income landscape and include some less obvious investments.
“Aircraft loans are an area we like in fixed income,” said Ramjee. “You have to build in a margin of error when you structure an aircraft deal but at least you have the security of being able to have the aeroplane if they don’t pay the debt. We have been getting 8.5% cash yields on our aircraft deals which is very helpful to the portfolio,” Ramjee added.
