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.
“Is the US economy going to bring about the next global recovery? Not too many people would think that. The leading edge is coming from the international (non-US) economies. US credit is as tight as it’s ever been. US consumers are not going to spend their way out. It’s the new world which is supporting global growth.”
Martin Currie’s flagship fund is a concentrated ‘Global Alpha’ fund, which is its first fund launched in Australia since opening an office in Melbourne in June, run by Kimon Kouryialas. “It’s a good time for a global equity specialist to be talking to Australian investors” says Fairweather. “The domestic stock market has done well, but is concentrated in financial and resources stocks. A higher allocation to international equities helps diversify risk and makes investors less vulnerable to the potential impact of a weaker Australian dollar”.
Risk management is an important consideration, and something Martin Currie spends a lot of time on when talking to investors. “To manage a global concentrated fund, it has to be fully integrated on a risk basis” says Fairwether. “We’re constantly monitoring the entire cross correlations between holdings”. Despite the turmoil of recent weeks, Fairweather remains bearish on US financials, because he believes we have not yet seen the “knock-on effect” when consumers start to default on (non-housing) debt. “I’d argue that the US consumer is in a worse position now than in 1990,” he says.
For a concentrated stock picker, though, financials still offer up opportunities, if not in the US. “At Martin Currie we have two experienced global financials specialists in our sector research team. Paul Sloane and Len Riddell have been invaluable in guiding us through one of the most testing periods I can remember. More recently, the continuing volatility has been creating opportunities for us to buy into stocks that are fundamentally sound on very attractive valuations. Despite the problems globally there are still growth financials in Singapore and Hong Kong, a Greek bank we think has good prospects and some nuggets in Brazil” Fairweather says.
Other themes are around selected resources, agriculture and power generation, where Martin Currie’s global sector research helps generates ideas for the portfolio. The firm has been a long-time investor in China, where it opened an office in Shanghai in 1997, run by one of the most experienced China specialists, Chris Ruffle. It has 13 staff, including a team of analysts, and about $US4.5 billion invested. Martin Currie has recently launched the first tranche of a China healthcare fund, which will invest in both listed and pre-IPO health care companies.