It has been a long time between drinks for global equities. It’s not only Japan which has disappointed international investors for a decade or more. In the 10 years to July, global equities, unhedged, returned investors a negative 0.5 per cent.
But unlike Japan in the early 1990s when the rot set in, the fundamentals driving global equities have by and large been sound, admittedly with a few cyclical peaks and troughs along the way and some significant regional differences. During that past 10 years there has been a big lift in sophistication in the strategies used by investors and managers. A range of indices is used alongside the cap-weighted MSCI Global ex-Australia, including equal-weighted and fundamental indices. Mandates have been broadened to allow the inclusion of emerging markets, long-only constraints have been removed and concentrated portfolios have become popular.
Investors are no longer prepared to pay much for traditional beta. And they are questioning how much beta they have really been paying for with their alpha managers. They are focused on lowly correlated strategies and are well aware of capacity constraints among managers with certain styles in certain asset classes. So, all that means that the more sophisticated international investors may have done reasonably well in the global equity opportunity set, notwithstanding the dismal performance of the markets overall.
James Fairweather, the chief investment officer for global equity specialist Martin Currie, says that the move to less constrained mandates can mean that investors have to find new managers who are better able to align their interests with those of their clients. “Fund managers have traditionally been rewarded for gathering assets,” Fairweather said on a recent visit to Australia from Edinburgh.
While many Australian super funds have been protected from the worst of the global equities malaise through hedging the $A rise, or at least partially hedging it, US investors in EAFE (Europe Australia and Far East) mandates have had a different ride. For Australian investors, the decision to hedge has probably been the most important investment decision of recent years, at least up until July. But US investors tend to have smaller international exposures and are less likely to hedge against the $US, to their detriment in the first half of the decade and their gain in the second.
Fairweather says that investors generally are showing more interest in global equities, but particularly US pension funds. “The US economy is integrated into the world economy, but if you had invested only in the US, until recently, you could have had one-third of your investment in financials,” he says.