Developed-market property is a good bet, says Barings

Review/outlook series: Marino Valensise, global chief investment officer at Baring Asset Management, explains why he's also keen on agricultural commodities and gold.

Marino Valensise has been global chief investment officer at Baring Investment Management in London since October 2007. He joined the firm in 1999 as head of credit and was promoted to the head of the fixed income and currency team in January 2003. 

Before Barings, Valensise spent five years with Commerz International Capital Management in Frankfurt, where he was head of fixed-income portfolio management. His previous experience includes positions with Amex Bank and Banca di Roma. 

Which investments proved most successful for Barings in 2009, and why?

One of the best performers in terms of individual stocks have been small-caps in the gold sector. We've been in that market for one-and-a-half to two years and have gone through a phase of quite static market prices in 2008 and early 2009. Most gold-dedicated miners are fairly small-cap firms, and the gold price really started to move in late summer.

The way to do gold exposure is through ETFs - which are typically backed by the physical metal - or you can buy gold stocks. What you do should be determined by where you are in the cycle. Last year, in mid-crisis, it was much cheaper to buy gold via stocks, because all stocks globally had been de-rated. But by the same token, there'll be a point at which you want to sell stocks and buy bullion directly.

We are still positioned in gold midcaps, but have taken quite a bit of profit in the past four weeks. These stocks have done so well because they are a leveraged play; if gold goes up by 10%, they go up by a multiple of that. One reason for this is that it takes so long for a new gold mine to come to market [in terms of production].

In a few cases, there are some technical reasons why certain stocks go up -- for example, Rand Gold is the only gold stock listed in the UK. When British fund managers that can only buy UK-listed stocks want to play the gold theme, that's the only stock they can buy, which can push it up even more.

Which investments proved least successful for Barings in 2009, and why?

One thing that hasn't worked for us is that we went through a period in late spring into summer, when our style was not in sync with the market. At that time, Markets rallied very strongly from March into May, June, July. It was all about firms recovering that had been supposed to go bankrupt -- the 'dash for trash' -- with deep-value names, such as banks, recovering at great speed.

We are not in that game; we are not value players. We play quality growth, so in that market we had an issue, and our portfolios did not rally as the market did. But we stuck with our philosophy, our process and our stocks. As the market value rally finished around mid-August, the fundamentals took over again and we made it all back. We're closing the year ahead of benchmark on all our products.

The point is that there were about three months when we struggled to keep pace with the market, because the market was buying stocks that made no sense. For example, the best-performing stock in April in the MSCI World was [US auto maker] Ford; we obviously weren't holding it. Sectors such as the auto and consumer sectors, which crashed in 2008/2009, bounced back, but not for fundamental reasons.

Which investments are likely to perform best in 2010, and why?

We are very much sponsoring the emerging-market equity trade, based on demographics. In terms of demographics, when comparing the East and the West, the difference has never been so dramatic. The East/West split is particularly significant, because there is a significant correlation between demographics and economic growth.

We take an interest in agriculture, commodities and stocks as a result of these demographic fundamentals.

GDP per capita in emerging markets is still low in absolute terms, but is growing fast. As it grows, the dietary requirements of the population change - people tend to eat more and better and consume more proteins. This has always been the case; take Japan in the post-World War II years, South Korea in the industrialisation years [of 1962-1989] and the US 120-130 years ago.

And in order to eat more and better, you need more corn, wheat and soybeans, and more equipment to work the fields. You can play [this theme] through commodities and through stocks related to the food chain -- from fertiliser makers to food distributors to equipment manufacturers.

Another attract feature is that this theme has not got more expensive compared to a year ago. In fact, the price of agricultural commodities via an ETF is actually cheaper than a year ago. They have not rallied with stocks; this is the cheapest commodity theme you can play. Emerging markets will drive this demand.

Barings' agricultural fund holds around 60-70 stocks linked to that theme, emerging, non-emerging, small and large caps. We have stocks listed in emerging markets, but we also have stocks listed in markets like the US -- such as [agricultural biotechnology company] Monsanto and [equipment maker] John Deer. These are multinationals that also sell into emerging markets. We also hold around four or five fertiliser makers globally, including [Canadian company] Potash Corp and Taiwan Fertiliser.

Another area that may be interesting going forward is property in developed markets, since governments are giving out money at low rates. Commercial property prices in the UK are down 30-40% from their peak in June 2007.

Annual rental yield is now 6-7% for UK commercial property. If you can borrow at 1% and get that yield, that's a decent return, especially on something that's already dropped that much [meaning prices are likely to rise again]. And in the UK, commercial property has gone down more than residential prices, although on the flip side, it is more closely linked to the economy, making it more dangerous.

Central banks are encouraging this carry trade, so property post-crash is something that is very attractive. Also, if you buy property instead of putting money into deposits, you also get some inflation protection.

The commercial property theme in the UK has been out of favour in the past 12-24 months, but is now gaining interest.

Which investments offer the least potential for 2010, and why? 

Japan is obviously not an attractive economy. We are underweight Japan, as it is cheap but, from a macro-economic and fundamentals point of view, very depressed.

US small caps are also unattractive -- the US economy has a lot of problems, including funding issues.

We also hate government bonds, especially from the US and UK, because these are governments where the currency being debased and which are printing more money. And if there is no foreign demand for these bonds, these countries will not be able to fund their deficits. In the long run, there is also the inflation question. People investing in government bonds tend to think it is the safe part of their portfolio, but it might actually be the most risky at present.

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