Multiple strategies enable fund to select the right equities

[First published in Personal Finance, January 2017]


Raging Bull Award for the Best South African-domiciled Global Equity General Fund on straight performance over three years to December 31, 2016

Certificate for the Best South African-domiciled Global Equity General Fund on risk-adjusted performance over five years to December 31, 2016

The Old Mutual Global Equity Fund’s highly pragmatic approach to stock selection continues to produce superior performance for its investors. This is the fifth year in a row that the fund has won the Raging Bull Award in the rand-denominated global equity general sub-category.

The fund achieved an annual average return of 15.29 percent (in rands) over three years, according to ProfileData. The benchmark for the global equity general sub-category, the MSCI World Index, returned an average of 11.33 percent a year over the same period. The 30 funds in the sub-category with a performance history of three years returned an average of 10.61 percent a year.

Global equity general funds must invest at least 80 percent in equity markets outside of South Africa at all times.

The fund has proved to be a consistent performer over the long term: achieving the best return (12.89 percent versus the MSCI’s 9.56 percent) over 20 years; 9.06 percent (versus 4.68 percent) over 15 years and 22.15 percent (versus 15.65 percent) over seven years. It was also second-best over 10 years with 12.24 percent (MSCI: 8.59 percent; the top-performer: 13.25 percent).

The Global Equity General Fund also received the certificate for the best South African-domiciled global equity general fund on a risk-adjusted basis over five years to December 31, 2016. The award of five PlexCrowns in the global equity general sub-category means it delivered the best consistent returns without too much risk.

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 team uses five strategies to identify shares that are mispriced – in other words, companies whose share prices are not a true reflection of their inherent value. The strategies are:

  • Dynamic valuation: identifies shares that are undervalued, although the companies have strong balance sheets.
  • Market dynamics: identifies shares that will benefit from economic trends, but whose prices do not reflect the expected benefits.
  • Sustainable growth: identifies companies that have strong growth potential that is not reflected in the share price.
  • Analyst sentiment: identifies shares that are likely to do well, although that is not reflected in the shares’ prices.
  • Company management: identifies companies with strong management teams.

“We look to understand if a particular stock is likely to out- or under-perform its index by incorporating company-level information,” Heslop says.

“And we don’t stop there, recognising that we do not actually buy companies, but shares in companies. The view on the stock is then a blend of these different views, which changes over time to reflect how the market is currently deciding which stocks to buy.”

Asked which strategies have been particularly dominant over the past three years, Heslop says: “Dynamic valuation has been strong over the period, even though value itself has been anything but consistent. We have managed this mainly due to our ability to capture the short periods in the past three years when buying cheap was a good idea.

“Analysts’ information has also been useful, because they give us clues as to which companies have something happening to them and whether we can make a profit from it,” he says.

Heslop says the team does not take large country, sector or stock positions, because country and sector biases introduce a lot of risk. Instead, the team seeks “to understand what type of market we are in by measuring what markets are doing. We then look to understand what types of stocks are likely to out-perform. We also recognise that nothing works all the time, so a diversified-style fund has a higher likelihood of consistent out-performance.”

This year will continue to be an uncertain one for investor sentiment, Heslop says. A number of elections in Europe, together with the “Trump effect”, could result in changes to investors’ appetite for risk.

“Using macro or geopolitical forecasts will continue to be difficult, as investors struggle to link the event with how the market will react to the event. In this type of environment, it is more important than ever to take care with top down, macro portfolio placement. We are more interested in how the market is behaving than in any explicit macro forecast.”

The minimum investment amount is a lump sum of R10 000 or R500 a month.

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