There are eight “gauntlets” that any managed fund will have to run over the medium term, according to Investec Asset Management investment strategist Michael Power, and while a Japanese equity fund might be lucky to meet one of them, funds investing in commodities or the emerging markets would satisfy almost all eight. One key “gauntlet” was a fund’s ability to “surf the carry trade out of the West and into the rest”, Power said. The fund should also “avoid dollar blindness”, Power said, by not achieving a majority of its returns in the form of US dollars, which the strategist said was declining and fading as the world’s reserve currency.
On a similar tack, Power said investors should choose funds which “achieved a real rate of riskadjusted return”, and thanks to quantitative easing, this no longer meant a comparison with US 10- year Treasury bonds. “By printing money, Ben Bernanke has eroded the price of risk. The real risk-free rate is higher than the 2.5 per cent you are getting on 10-year Treasuries,” Power said, citing something like the 6 per cent cost of 10-year capital in Australia as a more appropriate hurdle for investors to consider.
Another “gauntlet” the fund should be able to run was the rise of the supranationals, Power said, pointing out the return of companies such as Google, Vodafone or McDonald’s had mostly been superior to their home equity markets. He said the new supranationals were coming from the emerging markets, pointing to the rise of Indian pharmaceutical giantsin- waiting, and the imminent initial public offering of Brazilian energy company Petrobras, which at US$76 billion will be the world’s largest ever float (eclipsing another emerging markets float, Agricultural Bank of China, which added US$21 billion to the capitalisation of the Shanghai bourse earlier this year).