Lloyds TSB concentrates on bigger picture

While many wealth managers are busy stepping up allocations to European equities, Lloyds bank is moving in the opposite direction.

“We have recently pulled back on our outlook for European equities, due to fundamental factors, the strength of the economic recovery and earnings momentum,” confesses Ashish Misra, head of investments at Lloyds TSB Private Banking, running £11bn (€12.8bn) in predominantly discretionary portfolios.

“European equities have had a pretty successful ride since last summer’s ‘whatever it takes’ speech from [ECB governor] Mario Draghi. You get the sense that the European equities rally is slightly overcooked.”

But at the same time, Lloyds’ clients are being advised to gradually increase equity allocations. “The bulk of our effort and energy is getting the big asset allocation calls right, as that is the key driver in portfolio returns,” says Mr Misra. “We leave the business of stock and sector selection to the fund managers we hold in our client portfolios.”

Firm believers in the multi-asset, multi-manager model, within a total return mentality, Lloyds searches for fund managers with “above average, consistent performance”. Once the selection has been made, says Mr Misra, “we just get out of the way”.

More pertinent to Lloyds’ clients than distractions such as the high dividend yield theme – pursued by a growing coterie of private banks – is the bank’s robust outlook on global growth.

“There may be pockets of the world where we are seeing reasons to be cautious, as in Europe,” says Mr Misra. “But in parts of the global emerging markets spectrum, the growth outlook is strong, earnings momentum remains strong and leverage levels are still sensible.”

Among the worries of Lloyds’ private clients has been a less certain outlook for the Chinese economy. “Last year, alongside the risk of Eurozone collapse and the ‘fiscal cliff’, a Chinese hard landing was the biggest concern among investors,” he says, with their worst fears not being borne out. The landing, says Mr Misra, was softer than most had expected.

“What gets lost is the longer-term trend of what is going on in China, with growth drivers changing,” he adds.

With fixed asset investing having fuelled the increase of Chinese GDP through the crisis to 2012, the emphasis will now switch to  domestic consumption as we move further into the new century. “That transition may be a tricky one to negotiate, but the evidence so far is that the Chinese authorities are not doing too shabby a job in managing this transition.”

But as well as assessing the economic and political climate before making key allocation calls, Mr Misra’s team is updating the tools and technology used to execute the process.

“We used to just look through one 10-year, long-term window for asset class returns,” prior to the financial crisis, which took root from 2008, he says. Along with other banks, Lloyds has decided that while its governance, due diligence and periodic performance measurement should essentially stay the same, data analysis metrics have had to change to cope with the new, heightened levels of uncertainty.

 “We have now refined our process to include a three-to-five year time horizon. This addition allows us to be a little more responsive to shorter-term asset price movements.”

That said, he has seen very little change in investor behaviour. “Investors have always been exuberant or nervous and cautious in turns,” says Mr Misra in reply to industry suggestions that the risk on/risk off polarised market environment, in vogue during the crisis years, might now be fading away. “This schizophrenic investor sentiment is as old as the hills, despite the new terminology,” he says.

Alongside sentiment, he believes asset prices are affected by fundamental factors and valuation variables. “Asset allocation is about getting a good idea about all three factors.”

Currently, there are three major risks he thinks private clients should be aware of, outside of Lloyds’ own uncertainty over branch sell-offs and concern about capital requirements. Firstly he sees the low risk of a premature withdrawal from ongoing low interest rate policy. The second, slightly higher risk, is the potential failure of co-ordination of exchange rate policies by bodies such as the G20.

The most serious risk is a geopolitical one. Aside from the potential conflict between Iran and Israel in the Middle East, he is concerned about North Asia. “You have the issue of four new, untested leaders in China, North Korea, South Korea and Japan,” says Mr Misra. “There is no way to legislate for geopolitical risks when defining an asset allocation strategy, but you must recognise they are on the horizon.”