Global investing: finding opportunities in uncrowded spaces
Philipp Wörz of PSG Asset Management.
Investing successfully over long periods is tough and there are masses of incredibly smart people combing the globe for bargains. To think that anyone has a leading edge in such a competitive space may well be misguided, especially when it’s been shown time and again that the average investor underperforms market indices.
However, Philipp Wörz of PSG Asset Management believes that when you look for opportunities in uncrowded investment areas, you put the odds in your favour. “There are no guarantees in investing, but you can improve your likelihood of achieving strong results at acceptable levels of risk by the way you approach it.”
Finding opportunities in uncertain times
Often the best investment opportunities are found in times of fear and uncertainty, says Wörz. “Competition for assets is less fierce, and the potential to find mispriced securities is good. When the issues that spook the market turn out to be temporary and prices recover, investors who deployed capital when valuations were depressed are rewarded.”
The key is to maintain a long-term view when assessing apparently plausible negative narratives.
Below are a few examples in recent history:
• the unpopularity of US banks amid heightened industry regulations a few years ago
• the negativity towards South African banks and industrials in the wake of ‘Nenegate’
• Microsoft and other legacy technology companies such as Cisco once being pronounced doomed by the ‘death of the PC’
• high-quality names such as Unilever, Heineken and Reckitt Benckiser being available at bargain prices at the turn of the decade, as consumer goods companies fell out of favour due to low growth rates
Investments in these parts of the markets, and others that were once unpopular, have yielded attractive returns for investors who found opportunities in the negative narrative.
“However, most investors tend to base their decisions on what has worked well in the recent past, because that is what they recall most prominently,” says Wörz.
Be careful of extrapolating recent performance
In the past decade, high-quality growth companies have outperformed value companies, and it can be tempting to extrapolate this performance. In fact, extrapolation has led to a significant shift in the investment styles of global fund managers, and the majority of global equity funds are now growth focused.
“We believe it is important to have an investment process in place that guards against basing decisions on recent performance as these areas of the market are typically more crowded and competitive,” says Wörz.
It is often possible to assess the popularity of countries or sectors simply from newspaper headlines, but Wörz believes in going about this more objectively by using quantitative crowding screens to identify areas with the greatest chance of mispricing. “The results don’t provide answers on where to invest, but they do indicate where investment opportunities are likely to be found,” says Wörz.
“Regions such as Japan, the UK (on the back of Brexit-related fears) and emerging markets in general are among those currently least liked by global investors, and are therefore the least crowded,” says Wörz.
“Similarly, valuation factors generally favoured by value investors (such as low P/E ratios and high dividend yields) are out of favour, while momentum factors (such as high P/E ratios and high expected earnings growth) are crowded,” says Wörz.
“Unsurprisingly, the least crowded sectors are those that are currently considered least exciting. Telecommunications, real estate, financials and materials are all characterised by low expectations, low prices and possibly mild neglect,” says Wörz. “These uncrowded areas are where we believe the best opportunities to find mispriced quality stocks lie.”
