Peter Dalgliesh is chief investment officer at Parmenion. He began his career on the graduate trainee programme at Barings Asset Management before joining Jupiter Asset Management, Gartmore and F&C. Before joining Parmenion in 2012 he was director of emerging markets at F&C, responsible Asia Pacific ex-Japan region.
Which fund in your portfolios are you most pleased with?
Amundi US Equity Fundamental Growth - a quality growth manager with a disciplined approach to valuations, which is ahead of the FTSE USA index over one, two, three and five years with only marginally higher volatility. Given the concentration and narrowness of the US market rally, these numbers are a testament to the dexterity and disciplined execution of Andrew Acheson and his team, and interesting to note that they have moved u/w a number of the Magnificent 7 names in preference for better value growth opportunities.
Which was your worst asset allocation call and what did you learn from it?
Our overweight position to emerging markets has not worked, yet! The thesis of faster domestically driven growth, falling real interest rates from excessively high levels, relative fiscal prudence and strength (especially compared to ill discipline of the developed world), cheap valuations and under-ownership leave us optimistic that over the long term this asset class has a lot of upside. When and what will be the catalyst to change its underperformance is unclear, but as long term investors we are willing to be patient, and the 2Q outperformance showed its potential.
Right now, China or India?
Depends on your time horizon. The long term Indian structural growth story is hard to beat. The government's focus on growth, driving investment to lift productivity and enhance competitiveness has the potential to materially raise GDP per capita (albeit from a low base) and feed the rise of the domestic consumer. Combined with India's favourable demographics there is a lot to like - however the market is not cheap, has performed well and is not without risks.
For China, it is undergoing a structural shift as well, moving towards a domestic consumption oriented economy coupled with high tech manufacturing. The historical low cost, high volume export oriented manufacturing model left the economy unhealthily susceptible to the global economic cycle. This is changing, but will take time, though ultimately is a sensible path to take. In the meantime, as the second largest economy in the world growing at over 4.5% with companies delivering earnings growth in the mid teens, yet trading on 10-11x PE and 1.8x P/B, and with investors underweight and with depressed expectations, the market looks oversold with scope for upside surprise. Within a diversified portfolio, China also offers appealing diversification benefits with a correlation to the S&P 500 now down below 0.5.
Biggest fund red flag?
Stocks held not conforming to their process and therefore leading to questions on delivering on the mandate. Each fund held within our portfolios has a role within their asset class in order to help us navigate the twists and turns of the market. The reliability on delivering that role is key, which is validated (or not) in our regular due diligence with the managers. When we see deviations in positions held versus their style and process this gives us cause for concern.
Best source of uncorrelated returns?
Uncorrelated to equities - we believe it remains global government bonds. Yes, 2022 was a difficult period, but arguably extremely abnormal as we moved away from an exceptional phase of zero interest rates - something we are not expecting to recur anytime soon. More recent volatility and flight to safety has encouragingly shown the value of global government bonds within a diversified portfolio and with yields ~4 per cent comfortably above inflation, combined with strong underlying liquidity, their role of ballast and resilience in times of negative growth and/or risk aversion is clear.
What makes your process different?
Our focus on risk first and foremost is no longer necessarily different as it was when we first started in 2007-08, but it is well proven, and that discipline and reliability is something we believe resonates with advisers and helps them in their conversations with clients to create a financial plan to meet their individual needs.
What do you think is your most interesting tactical call at the moment?
Positive on UK mid and small caps. The underperformance of the UK, and especially mid and small caps, over the recent past is well documented. Persistent selling has left underlying valuations abnormally cheap, which is unsurprising having come through a cost of living crisis, a rapid increase in interest rates and a move away from our largest trading partner. But things appear to be changing. Inflation is down, real incomes turning positive, interest rates off their peak, housing market finding its feet, business and consumer confidence is rising, and a new government with a clear 'growth mission' which is expected to last a full five year term. These positives are made all the more attractive because on a relative basis other countries appear to be far less stable. All told we believe this raises the attractiveness of UK mid and small caps and aligns with our long term capital market assumptions which place them near the top of all asset class expected returns.
Is there an asset class you are currently on the fence about (buying or selling)?
Europe. Valuations are reasonable, but not cheap. Growth is improving from the technical recession of 4Q 2023, but unexciting. Politics is uninspiring. The ECB is perennially slow and cautious. There are a good number of leading internationally competitive companies in Europe, so exposure is warranted, but its not clear what near term sustainable outperformance triggers are on the horizon.
What (other than Asset Allocator of course!) have you read recently which you've found particularly interesting or insightful as regards your work managing portfolios?
Reports on private markets. The asset class appears to be the flavour of the month at the moment. Yet with 28,000 companies globally waiting to be monetised amounting to $3tr it feels like a brave conclusion that the historical risk adjusted returns seen over the last decade (when interest rates were artificially low) can be reliably assumed to recur. Furthermore a recent IMF report found that whilst funding into private equity has meaningfully slowed, that into private credit continues, but over 70 per cent of those private credit proceeds are going into private equity, so the risk continues to grow!
What's your hottest investment take?
With fiscal irresponsibility (especially in the US which is abusing its 'exorbitant privilege' as the world's reserve currency) there is a rationale that yields on investment grade credit could come in lower than global government bonds. The US debt situation is a farce. A fiscal deficit of over 6 per cent in 2023 with record low unemployment smacks of ill-discipline and arguably recklessness. 9.7 per cent of US government revenues were spent on servicing their debt in 2023, this is projected to grow to over 30 per cent by 2030 according to the CBO. There is a real risk that the 'kindness of strangers' quote from Mervyn King in reference to the UK's dependence on foreign investors might also start to be applied to the US. Unlikely to lead to a 'crisis', but could certainly taper the appreciation in the dollar and raise Treasury risk premia.
