Stock-picker ignores the noise

[First published in Personal Finance, January 2016]

Investec GSF Global Strategic Equity Fund

Raging Bull Award for the Best (Financial Services Board-approved) Offshore Global Equity Fund on straight performance over three years to December 31, 2015

Investec’s offshore fund-management division, based in London, is a regular recipient of Raging Bull awards. This year, it was the turn of its GSF Global Strategic Equity Fund. The fund is denominated in United States dollars, but funds in this category are judged on their performance in rands.

In rand terms, over the three years to the end of 2015, the fund delivered 34.52 percent a year, on average, for South African investors, according to ProfileData – about three percentage points more than its benchmark, the MSCI World Index.

The fund is a sub-fund of the Investec Global Strategy Fund, which is domiciled in Luxembourg.

Its manager, Mark Breedon, explains Investec’s proprietary 4Factor equity selection process: “We follow an active strategy that focuses on companies we believe are high quality, attractively valued, with improving operating performance and which are receiving increasing investor attention. These constitute our four factors: strategy, value, earnings, and technicals.”

Breedon says the approach is based on the belief that equity markets are inefficient because of behavioural errors or biases on the part of investors, and the process aims consistently to identify mispriced opportunities.

He says the Investec GSF Global Strategic Equity Fund focuses on companies that are undergoing a change in their ownership or business conditions – for example, through consolidation, privatisation, or restructuring. His team believes that investors under-react to these sorts of changes.

Breedon says that, gross of fees, the fund out-performed the benchmark in each of the past three years, as it has done in 12 of the past 15 years.

“Like any fund, we have had a few low points. Some of our energy holdings had a rough ride as the oil price fell sharply. Also, our lack of exposure to large-cap index constituents like Microsoft, Google and Amazon weighed on returns during 2015. But we chose not to hold these stocks on account of their high valuations.

“However, our out-performance has been driven by a string of successful investments – for instance, in Activision Blizzard, the American gaming company. We also profited handsomely from the growth of NXP Semiconductors, as they benefited from increasing semi-conductor content in Apple devices. We have also had success in the healthcare sector, and a number of our Japanese holdings have been among the top contributors to returns,” Breedon says.

He says his team, as bottom-up stock pickers, doesn’t have sectors or regions that it deliberately avoids.

“We believe there are opportunities at the stock level to be found anywhere in the market. There are certainly sectors and regions where there are significant value gaps – most prevalent in energy, materials, financials and emerging markets. However, you could say that this was equally true 12 months ago, and yet growth, not value, has continued to be the dominant driver of returns. So, while a strong valuation case is enticing, it needs to be supported by other fundamentals.”

It’s likely the year ahead will be a rough one, but Breedon says that, to an active manager, there is a bright side: turbulent equity markets are rife with investor misbehaviour, which offers opportunities.

“Sectors, or regions, with both positive growth and valuation support are admittedly scarce. But information technology and Japan are areas where we remain overweight. Importantly, regardless of region or sector, good opportunities can always be found at stock level, and this is where we will continue to focus our attention,” he says.

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