Rotating freely between styles and sizes, Investec’s GSF European Equity Fund has produced heavenly rewards.
There aren’t many funds that outperform the market year after year after year, but the Investec GSF European Equity Fund has been one of them.
For the past five years, it has outperformed on average by between 6% and 7% per annum before fees. This is an enviable record. So what is its secret?
One clue is in its strapline: “Adaptable portfolio: disciplined process.”
There is nothing doctrinaire about the fund. Instead, agnosticism and adaptability is its guiding philosophy. Style-agnostic, it is a model of flexibility and pragmatism, rotating smoothly between styles according to the vicissitudes of the market.
It is benchmark-agnostic, managed on the basis of four factors and built from the bottom up. It is also market-cap agnostic. This is something that marks it out from other funds. It is happy to delve into the mid-cap universe and has moved across the capitalisation range.
Ken Hsia (pictured), who has managed the fund for five years, explains the building blocks of its success.
“Management of the fund is achieved by using Investec’s ‘four factor’ process. Two of these factors are from traditional metrics and two from behavioural economics. Each of these factors can individually drive performance but combining them, we believe, drives consistent outperformance,” he says.
The traditional metrics used are quality and valuation, while the behavioural are improving operating performance and increasing investor attention. The share price and its trajectory are examined, as are earnings. If earnings increase, there is a good chance they will increase next time too, but the market does not always recognise this, and this creates pricing anomalies.
“We screen our universe of companies using these four factors each week. The screening process is a matter of keeping eyes on the whole waterfront,” Hsia says. “Once we have run the screen our analysts do a deep-dive analysis before putting stocks into portfolios.”
Unsurprisingly, the fund has been able to perform very well. There are two measures – one of them is how it is beating its benchmark over time. It has beaten it consistently, typically with a beta of 0.9 over the last five years.
Second, if the outperformance is broken down to examine its location in the fund, it is broad-based and comes from stocks throughout the portfolio.
The team at Investec has found certain themes driving performance over the past five or six years, which they believe will continue. These can be seen as three elements.
First come the ‘global winners’, such as the luxury goods company Kering, which owns Gucci. The fund also has a stake in the iconic upscale fashion brand Burberry.
The next theme is companies that have more exposure to Europe, which is seeing some cyclical tailwinds.
The European picture after some years of quite pedestrian results now glows with health. It has had a great year on the back of significant earnings improvements and is continuing to improve.
“Europe has some world-class companies, so they benefit from global growth,” notes Hsia.
The third theme centres on keeping a watchful eye on challenged industries that may well experience a phoenix- like recovery. An interesting idea we are seeing at the moment, explains Hsia, is the consolidation in the banking industry – especially in Spain. Good cost reduction programmes, especially in branch networks, mean valuations do not come close to discounting a full recovery in earnings.
We are currently seeing numerous attractive opportunities like this in Europe, but what excites us further is that markets are reasonably valued – especially against the US market – and are below their historic high. This all applies across a broad range of sectors, meaning the improvement has also been broad.
Foundations of success
So, the reasons for the fund’s successful navigation of the market’s waves and currents can be summarised in four points.
First is its hallmark ‘four factor’ investment process.
“We believe to outperform, we need to avoid behavioural errors; this is behavioural economics,” Hsia says. “We believe to do things right, you need a strong investment process based on fundamental drivers of value. We are style-agnostic; whether value or growth drives the market – we don’t care.”
Second is its portfolio construction. The fund’s starting point is a universe of 1,200 European stocks versus the MSCI Europe benchmark of 450 stocks.
“If you want to beat the benchmark, one of the rules is you must have more opportunities than your benchmark,” comments Hsia.
Equally weighted benchmarks generally outperform market capitalisation based benchmarks because an equal-weight benchmark generally has more of the cheaper stocks. In addition, it generally has more mid- and small-cap exposure, where that part of the stock market is more inefficient.
Hsia continues: “Value is one of the four factors and because we have a value bias and a mid/small- cap bias, we have every opportunity to beat the benchmark.”
The third point in the fund’s favour is its strong risk controls. Hsia and his team believe that to have good risk controls, you need to follow the investment process.
The stress is on discipline. Having an independent risk team means there are two controls, one from within the team and one from without.
The fourth point is that it is a truly active fund. The main definition of being active is having a portfolio very different to the benchmark and thereby taking a lot of active risk. The fund’s active share is 85%, meaning only 15% of the fund’s holdings match the benchmark.
The result is that fund performance is within the top decile, with less than the market risk. It has an information ratio of 1.6 over the past 5 years. Out of around 1,000 funds, only handful can boast such risk-adjusted returns.
Past performance is not a reliable indicator of future results and investments carry a risk of capital loss. Calendar years returns (%) for Investec European Equity Fund and MSCI Europe in brackets; 2016: -0.8 (-0.4); 2015: 3.6 (-2.8); 2014: -1.4 (-6.2); 2013: 36.2 (25.2); 2012: 29.8 (20.7).
DISCLOSURE: For institutional and financial advisors only. Source: Morningstar, 5 years ending December 2016. Performance is net of fees (A Share class, NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD. If the share class currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. The opinions expressed are those of Investec Asset Management at the time of publication and are honestly held but are not guaranteed and should not be relied on. Fund prices and English language copies of the Prospectus and local language copies of the Key Investor Information Documents may be obtained from www.investecassetmanagement.com. For more information contact us: www.investecassetmanagement.com/contactus. Issued by Investec Asset Management, November 2017.
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