Global fund wins on strategy

A fund that follows investment themes to take advantage of the mispricing of shares around the world was again the best performer among all the foreign equity general funds over the past three years.

The Old Mutual Global Equity Fund (A) collected its second Raging Bull Award in succession for the best rand-denominated global equity general fund at this week’s award ceremony.

The fund was the top-performing fund over three years to the end of December 2012, with an average return in rands of 36.35 percent a year over the period, according to ProfileData. The benchmark for the foreign equity general sub-category, the Morgan Stanley Capital World Index (MSCI), returned 26.84 percent a year over the same period.

When the fund won the award last year, its average annual return for the three years to the end of December 2012 was 14.78 percent a year in rands.

A phenomenal 74.01-percent return over the year to the end of December 2013 boosted its three-year average annual return.

The fund is managed from London by Ian Heslop, head of the global equities team, and Amadoe Alentorn and Mike Servent, both fund managers, at Old Mutual Global Investors (OMGI) in the United Kingdom.

Heslop says last year was the best of three good years for the fund.

Rather than adopting a single investment philosophy that would result in periods of out- and under-performance, OMGI UK takes a multi-strategy approach that aims to identify shares that are underpriced.

Shares are chosen in line with five investment strategies, and typically OMGI increases the emphasis in the fund on shares fitting into one or more of its five investment strategies, depending on market conditions, making the decision on which strategy to intensify at any point based on empirical information, Heslop says.

In this way, the fund is able to produce more stable returns than funds that focus on undervalued shares only, he says.

The valuation-based investment strategy, which is well-used by many managers, involves selecting shares that are undervalued but where the company has a strong balance sheet.

However, there are times when cheap shares get even cheaper, and it is at these times that the valuation-based strategy under-performs, Heslop says. During these times, OMGI relies on its other strategies: market dynamics, sustainable growth, analyst sentiment and company management.

Last year, all five strategies delivered good returns for the fund, while in 2012 the valuation strategy did not do so well, but the other four strategies delivered good returns, Heslop says.

The market dynamics strategy identifies shares in industries that will benefit from strong medium- or short-term economic trends, but whose prices do not reflect the expected benefits. Last year was a year of low volatility on global share markets, and Heslop says the market dynamics strategy works particularly well in these conditions.

The sustainable growth strategy identifies the shares of companies that have strong growth characteristics but are mispriced for various reasons, Heslop says.

The analyst sentiment strategy identifies the shares that market analysts have identified as ones that are likely to do well but where that information is not yet reflected in the prices of the shares.

The company management strategy identifies the shares of companies with good management teams.

The fund invests in a large number of shares – currently about 370. Heslop says investing in so many shares does not mean that OMGI lacks conviction; its conviction lies in its investment strategies.

The fund’s wide diversification means its investors never feel the pain of the fund manager making wrong calls on large numbers of a few select shares, he says.

The Global Equity Fund closely tracks the country allocation of its benchmark, the MSCI, relying on stock selection to add value.

Heslop says it is difficult to make calls on how to allocate to countries, so while positions are taken relative to the shares included in the MSCI, the fund will invest only up to half a percentage point overweight or underweight relative to the index. Therefore if the fund identifies a share that is not in the index, it may invest only half a percent of the fund in that share, Heslop says.

Last year, all the regions in which the fund was invested – the United States, Europe and Asia, excluding Japan – performed well for the fund, he says.

Looking ahead, Heslop says, you can expect middle-of-the-range to high single-digit returns from global equity markets in line with earnings growth. But volatility on global equity markets will rise given that it has been kept artificially low by central banks around the world. Heslop says this is the start of the end of quantitative easing in the US, and countries like the UK will follow.

This unwinding of the policies that supported global economies following the 2008 financial crisis will lead to some hiccups on global markets, because some countries’ policies may miss their targets, resulting in their economies growing too quickly or too slowly, Heslop says.

The uncertainty around the tapering of quantitative easing could have some short-term affects on global equities, he says.

Heslop also says that last year, share prices on global equity markets went up significantly without this being supported by earnings growth in many shares. This has led to some areas of the market looking expensive, which could also upset returns.

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