Business | Investment
Sarasin goes long on equities
Banks on real assets sharply outperforming government bonds in next 2-3 years
- By Robert Cookson, Financial Times
- Published: 00:00 November 28, 2009
Market fears that a "bubble" is developing in global equity markets are totally misguided, says Burkhard Varnholt, chief investment officer of Sarasin, who is betting that stocks have another 20 to 30 per cent to rise.
The Swiss private bank reckons that real assets — equities, commodities and property — are going to sharply outperform government bonds and credit over the coming two to three years, propelled in part by the flood of liquidity that central banks have pumped into the global financial system.
While that view has become increasingly popular among asset allocators in recent months, as reflected by the latest Merrill Lynch fund managers survey, Varnholt believes it remains far from consensus.
"The vast majority of investors are more overweight cash and fixed income securities than they have been in living memory," he said.
"I still believe it's a contrarian policy to bet that in 2010 real assets will again outperform paper."
To put this view into practice, Sarasin has been holding a 60 per cent exposure to equities since July — double the level from the start of the year.
In expectation of another one or two quarters of rising corporate earnings, Varnholt is recommending that clients buy stocks in sectors such as media and technology that are most highly geared to economic recovery.
At the same time, Sarasin has decided to exclude UK and US government bonds from its portfolios.
Concern
"We're concerned that all the fiscal support that the United Kingdom and [the] United States have provided just feels like burning your furniture in order to heat your house," he said.
"It's not a very sustainable practice."
The vast fiscal stimulus policies adopted by advanced economies would ultimately be felt as a "chronic disease" that would limit growth, but they did not present an acute challenge to financial markets any time soon, he said.
To hedge against the possibility of policy mistakes and market risks such as an unexpected tumble in the dollar, Sarasin recommends a 10 per cent portfolio allocation to gold.
"We still hold the highest allocation of gold this bank has ever held," he said.
"I hope it doesn't make us much more money because if it does I fear that the rest of the portfolio won't do so well."
Dollar reversal
Gold prices, which have been flirting with record highs, have probably reached a top, he said, while the decline of the dollar would soon reverse.
Sarasin has made several big decisions this year to overhaul the way it allocates assets. For one, it has boosted the proportion of emerging market stocks in its equity portfolios from 5 per cent to more than 30 per cent — a move designed to reflect emerging markets' share of global gross domestic product.
As a result, Sarasin was last month crowned the best private bank for both innovation and portfolio management by The Banker and Professional Wealth Management.
In another strategic shift, Sarasin this year started to apply a "sustainability filter" across all of its discretionary portfolios, searching for assets that provide financial, environmental, and social sustainability.
The approach requires analysts to make qualitative judgments about a company's long-term future, rather than simply focusing on quarterly results and discounted cash flow analysis.
The 168-year-old institution says the methodology helped it decide in 2007 to exclude investment banks from its portfolios on the basis that they lacked transparency.
"It is something that always rings an alarm bell from a sustainability perspective when annual accounts can only be understood by the off-balance-sheet, rather than on-balance-sheet, elements."
Sarasin's definition of sustainable investment is by its own admission somewhat subjective.
Varnholt said he had no problem investing in tobacco companies, even though they remain a bête noire of many ethical investors.
Nuclear power companies, however, are excluded from Sarasin portfolios.
"The trouble with nuclear power is that the question of how and where you store the nuclear waste remains unresolved.
"As long as it's unresolved it's unsustainable."
Higher returns
Whatever the ethical considerations, there is some evidence that sustainable investment delivers higher financial returns than traditional methods.
Sarasin's flagship socially responsible global equity fund has outperformed the MSCI World index by an average 4 percentage points per year over the past decade, Varnholt said, while its flagship sustainable fixed income fund has beaten its peer group by 80 basis points per year over the past five years.
As more and more investors become concerned about business sustainability, companies that neglect the social or environmental consequences of their actions would increasingly face an increase in their cost of capital, he said.
"It actually makes business sense to be a responsible company."
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