Multi-faceted Approach Pays Off for Investors

[First published in Personal Finance, January 2014]


Raging Bull Award for the Best South African-domiciled Global Equity Fund – the top-performing fund on straight performance in the global equity general sub-category over three years to the end of December 2014

Multiple investment strategies and a highly pragmatic approach to stock selection have again proved to be a winning formula for Old Mutual’s Global Equity Fund. For the third year in a row, the fund collected the Raging Bull Award for the best rand-denominated global equity general fund.

The fund out-performed its peers over the three-year period to the end of December 2014, with an average annual return of 36.49 percent in rands, according to ProfileData. The benchmark for funds in the global equity general sub-category, the Morgan Stanley Capital World Index (MSCI), returned 26.99 percent a year over three years. The average annual return of funds in the sub-category over the same period was 26.58 percent.

The fund is a product of Old Mutual Global Investors (OMGI), based in London. Its managers are Ian Heslop, the head of the global equities team at OMGI, Amadeo Alentorn and Mike Servent.

The managers use five investment strategies to identify shares that are “mispriced” – they believe the share price is not a true reflection of the intrinsic value of the company.

The rationale for a multi-strategy approach, they say, is that adopting a single investment style results in out-performance only when market conditions are conducive to that style. Heslop says that chanelling a portfolio into a particular investment style – such as growth, income or value – is the cause of many active managers struggling to beat an index consistently.

The fund’s five investment strategies are normally rotated, depending on market conditions, and the decision on which strategy to intensify at any point is driven by empirical information. In this way, the fund is able to produce more stable returns, he says. The five strategies are:

* Dynamic valuation, which is based on selecting shares that are undervalued but where the companies have strong balance sheets.

* Market dynamics, which identifies shares that will benefit from strong medium- or short-term economic trends, but whose prices do not reflect the expected benefits. In this strategy, industries supported by economic factors are identified.

* Sustainable growth, which identifies the shares of companies that have strong growth characteristics but are mispriced for various reasons.

* Analyst sentiment, which identifies shares that analysts have identified as ones that are likely to do well, but where that information has not yet reached the market and is therefore not yet reflected in the shares’ prices.

* Company management, which identifies companies with strong management teams that are expected to grow company profits.

All these strategies have contributed to the fund’s performance over the past three years, but dynamic valuation has made the most difference to the fund’s returns.

The managers’ approach to valuation is not simply to identify cheap shares; after all, a share may be cheap not because it is mispriced, but because it is correctly priced, in which case the fund’s exposure should be kept to a minimum. Instead, share selection is based on a combination of value and quality. The emphasis is on shares that will enable the portfolio to earn consistent returns.

The managers are very pragmatic when selecting shares. The fund’s investment universe is some 3 200 shares, so the portfolio can include a large number that are not in the index.

The managers also pay strict attention to downside risk (the extent to which an investment may lose value).

Heslop says it is difficult to make calls on how to allocate to countries, so although positions are taken relative to the shares included in the MSCI, the fund will invest only up to half a percentage point overweight or underweight relative to the index. Therefore if the fund identifies a share that is not in the index, it may invest only half a percent of the fund in that share, Heslop says.

Looking ahead, he says the fund’s multi-strategy approach will stand investors in good stead to cope with a key “investment theme” that, he believes, will make a comeback this year: volatility. The central banks have dampened down volatility considerably by “bleeding” money into the markets. But volatility levels are likely to normalise, he says, and markets will become more uncertain.

The fall in the oil price will result in trade-offs: growth among oil producers will suffer, but consumer spending will be boosted. Relative to its benchmark, Heslop says the fund has been underweight in energy stocks for some time.

Worldwide, economic conditions are starting to normalise, and this growth will be realised in equity markets.

Markets in the United States are not cheap, but they are not expensive either, and there is no reason for them not to move higher. He says Europe remains a “basket case”, in need of the monetary stimulus policies that kick-started growth in the US. Regarding Japan, returns will probably remain relatively flat.

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