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12th November 2015

Elite Rated M&G Episode Income is now five years old. It invests in a range of assets and pays a monthly income. The name “Episode” refers to those periods of time when investors’ emotions cause them to act irrationally. The manager uses behavioural finance to find pockets of value and invest against the herd rather than following it.

Photo of Steven Andrew

At a meeting this week, Steven Andrew, the fund manager, shared his thoughts on the investment environment today and where he is finding opportunities.

Q: How do you go about making investments?

“When people talk about an investment environment today, compared with the past, it is nonsense. We just know what happened next in the past so we feel more comfortable with it. To me, investing isn't about knowing what will happen next, it is about where the price is today. If you buy assets at a good price, you automatically get a margin of safety to protect you from any subsequent volatility. So we try to do a 'pre-mortem' - assess the facts and decide how to act in advance so we don't get caught up in the emotion of the moment.”

Q: What do you think of the investment environment today?

“Here are the facts today: we are some way through a disinflationary process globally. In terms of political ideology shared by most countries, liberalisation of trade and product markets and even labour markets is the direction in which you should continue to go. Capital wins over labour. Profits win over wages. This means we are less likely to generate inflation in a structural sense, as it acts as a tax on consumption rather than a self-feeding wage-driven spiral. If these conditions continue, and if we get a bear market in bonds, I would actually be buying them.

“2015 has been all about positioning funds for interest rate rises. The Federal Reserve could have done us a favour and already 'lanced the boil', but we are still waiting. However, to me this is an event risk, nothing more. Once they have bitten the bullet and raised rates, reassuring the markets that they won't be big or fast increases, we'll all relax again. China is an interesting distraction, nothing more.”

Q: Where are you finding opportunities?

“I've been adding a little to selective emerging market government debt and currencies as I think a lot of the problems are already in the price. For example, Brazil and Mexico.

“I'm particularly keen on US banks. No one likes them as they are seen as evil after the financial crisis. But they are cheap relative to their own market and sector. They are also in the only main sector where profit margins expand when interest rates go up. This is because they don't pass on interest rate rises to the consumer for a good year or so after the central bank raises the base rate.

“I also expect to get decent returns from European equities.”


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Steven's views are his own and do not constitute financial advice


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