March 2015

GLOBAL EQUITIES: Transatlantic crossing

Stream cruiserGlobal equity funds have risen in popularity and managers in this sector have their eyes on diverging economies. Alix Robertson looks at different approaches to the US and Europe and finds that dividends remain a popular theme. The road to recovery as the financial crisis potentially fades from view is rockier for some countries than for others. The International Monetary Fund (IMF) World Economic Outlook for January this year highlights “marked growth divergences among major economies”.  In the US, which ended its quantitative easing (QE) regime in October last year, growth has been even stronger than expected. But in regions such as Japan, which fell into recession in November, growth has fallen short of expectations. These differences mark an ongoing trend, echoing the IMF’s outlook report for April 2014 entitled Recovery Strengthens, Remains Uneven.  The multi-speed recovery is a theme global equity managers can do something useful with – and investors seem to appreciate this.  Global equity funds had the best net retail sales in the UK among equities twice during 2014, at £391 million (€535 million) in May and £255 million in September, according to UK trade body The Investment Association. David Hogarty, head of strategy development, global equity strategies for institutional asset manager Kleinwort Benson Investors, has seen a change in investor sentiment towards the asset class. Kleinwort Benson has a specific focus on global equity strategies, and Hogarty says that until recently, investors were reluctant to give up a heavy domestic bias.  “I think people have really started to pull the trigger in the last 18 months or so to invest in global equities in a way that they haven’t done before,” he says. “They still use regional buckets, and I think they always will, but there absolutely has been a move to say, ‘I’m going to have a core, which is going to be a global equity.’” With the ability to diversify and balance the fortunes of different regions across the globe, a key question concerns how global equity portfolios will diversify along geographic lines in a multi-speed world. US OR EUROPE?
A major focal point for global equities managers in 2015 is how to approach the US and Europe.  While the US has stormed ahead with strong economic growth after a few years of QE, the Eurozone is still troubled and has only just dipped its toes into the QE stimulus.  Hogarty is cautious when it comes to Europe. “I think Europe is definitely going to have its difficulties, there’s no doubt about that,” he says. “I think nobody really knows how the Greek problem is going to be resolved, or what’s going to happen.” Bruno Taillardat, investment director and portfolio manager for equities at Unigestion, is also watching developments in Europe carefully. While viewing QE as a positive development for the equity market, he says political uncertainties and divergent viewpoints between countries such as France and Germany could cause problems. “Markets hate uncertainty,” says Taillardat. “In the short term this could lead the equity market higher, but in the meantime it could introduce high volatility.” Taillardat prefers the stronger fundamentals seen in the US. “We tend to build a portfolio which has natural exposure to defensive sectors,” he says.  “Right now we are quite positive on the US, because we believe the economy is really improving, real estate is improving, consumer confidence is very high, and unemployment is getting lower and lower.” Behind this favourable outlook lies the direct relationship in the US between consumption and equity markets. However, Dylan Ball, executive vice president and portfolio manager for the Templeton Global Equity Group, is more positive about Europe. Ball is a value manager who sees the current climate as “a very exciting time” and stresses that “really the story is Europe for us”.  “We’ve got half the portfolio in Europe right now,” he says. “There is a lot of fear, and it’s discounted into the market. Stocks are trading much cheaper than their US equivalents, and time has shown or history’s told us that this when there is potential to make money.” Ball looks for companies that can double investors’ money over a five-year period, through an increase in valuations or earnings, and sees opportunities in the healthcare and energy sectors. For him, the strength of the US recovery is now, from an investment perspective, a risk in itself. “The dollar and the US is a bit of a sure bet and that’s getting built into valuations,” he says, “It’s where people feel safe enough to invest, and that word safe is never a great criterion for investing.”  Another factor for global equity managers is diverging currency valuations. At Kleinwort Benson, Hogarty says currency has played an increasing role in portfolio decisions. “Since the financial crisis up until last year, as a global fund manager you didn’t really have to think about currencies, there was no real movement in currencies. That all broke down last year. Whether you’re a sterling investor or a euro investor or dollar, you really have to think about the currency exposure in a way that you didn’t have to before.” Jeremy Richardson, senior portfolio manager in the global equities team at RBC Global Asset Management (RBC GAM) says changes in currencies could create new opportunities for global equity funds.  “I think there’s an opportunity for global equities to take a larger share of investors’ wealth away from country or region-specific funds. I think that’s a trend that we will see continuing,” he says. “If you’ve got a depreciating currency, the investments you own overseas are going to be worth more in value, and that may prompt people to reassess the opportunities that they have overseas or abroad.” HUNT FOR YIELD
The dividend theme of recent years is still playing out strongly. Since bond yields have been so low, investors have sought yield from equities through companies paying high or stable dividends.  Peter Ferket, chief investment officer for equity and member of the Robeco Institutional Asset Management Executive Committee at Robeco, notes that this theme has changed the landscape, and more traditional approaches of fundamental active products have fallen into the shadow of a new variety of global equity options.  “An approach to global equity investing that has been very popular in the past three to five years has been low-volatility investing and high-dividend investing,” Ferket says. Investors are now looking for equity-like returns with lower risk and lower volatility, as they want alternatives to income investing, leading high-dividend strategies to become extremely popular.  Richardson at RBC GAM agrees. “With bond yields where they are, the search for yield has migrated to the equity market,” he says. “Anything to which you can attach some significant coupon or dividend yield has been chased by investors.” He says that demand is almost universal, with clients around the world putting biases into their portfolios to generate income, especially as ex-bond investors who are not getting a yield from owning debt try their hand in this part of the equity market. However, Richardson notes that all eyes will be on the Federal Reserve as investors wait for interest rates to rise. “With more normalised interest rates, ex-bond investors or income investors would be presented with another option in order to be able to get a yield and earn interest, and that may mean that this effect becomes less strong in due course.” FACTOR INVESTING
Other product variations are also on the horizon in the global equities space. At both Unigestion and Robeco, this rise of ‘smart beta’ has created an appeal for factor-investing strategies. At Unigestion, Taillardat expects a factor-investing product to join its global equity offering this year. The aim is to provide exposure to a pure equity strategy, but with lower volatility and lower drawdowns. “We are working on an allocation on systematic factors, such as value, momentum, quality, size,” he says.  “People talk a lot about factor investing, and we believe that we can provide a good risk management process and a very niche factor portfolio.” At Robeco, Ferket says that as passive strategies have gained popularity, active strategies have become increasingly highly active, leading many to look at factor investing as a third way between passive and active approaches. In 2014, Robeco introduced a quantitatively managed multi-factor investment fund within the global equities range, combining low volatility, momentum and value factors. Ferket notes that the firm has seen increasing interest in a multi-factor approach to global equities and has already implemented multi-factor solutions for three large institutional investors. “Factor investing is something we believe will be here to stay,” he says.
©2015 funds europe

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