How deep are the pockets of excellence around the world?
Fund managers are always on the lookout for pockets of excellence that have the potential to generate significant alpha for the funds that they manage. But since the global financial crisis, this has become harder to achieve as the market has proved to be volatile in its uncertainty at times.
This does not mean that there are no pockets of excellence to be found. A major source of alpha over the past few years has been equities, and this seems likely to continue. At the recent Glacier Navigate Event, hosted by Sanlam, a panel of international fund managers discussed this issue at length.
The Europe success story
One of the biggest success stories over the past few years has been the recovery of European based equities, especially in the face of the events in Greece and other European countries that were staring significant financial fallouts in the face.
Dylan Ball, Portfolio Manager of Global Equities at Franklin Templeton Investments, pointed to the fact that in the immediate aftermath of the financial crisis, the majority of the worlds risk was concentrated in the European region. This has certainly improved over the past two years or so to the stage where the world can look towards Europe to gain significant ground that they lost during the crisis.
There has been a lot of scepticism over the European recovery with many people speculating that the recovery could be a bubble that is close to bursting. And if the bubble bursts, fund managers natural reaction would be to go short on any investment in the region.
Piet Viljoen, Chairman of RECM, said that this is the wrong approach because people are seeing the risk from what has happened in the past. He added that the correct approach should be that people need to look at the risk that is in front of them at that particular moment. There is a distinct difference between perceived risk and perspective risk.
Oil testing theory
This theory was tested significantly by the performance of the oil price over the last year. Oil has always been a commodity that has been seen as a pristine investment as it is driven by a high worldwide demand. However, with the USA pushing ahead with its shale mining project, the world’s biggest consumer of the commodity has applied the brakes in a significant manner.
To put this into perspective, in May 2014, the oil price was pushing $115/barrel. In less than a year, the price dropped to under $50/b in January 2015. A drop of over $65 in eight months is significant and indicates significant risk. However, this was unpredictable and unavoidable as Viljoen pointed out that not one fund manager saw the drop. He also added that the volatility in the price should not influence ones decision on buying the stock.
Ball agreed with this sentiment and added that the drop could have been more pronounced. This was counteracted by BP and Shell cutting back on their capital expenditure after the price drop, which stabalised the stocks. Ball said that Franklin Templeton’s view is that the oil price has a near term horizon of $70/b but has a five year horizon of $80/b.
Don’t expect much from bonds
While there has been a massive drive towards equity based investments, fund managers have been avoiding bonds and cash like the plague. This was driven by the economic fallout in Europe as well as the implementation of Quantitative Easing in the US and Japan.
Marcus Brookes, Head of Multi-Manager at Schroders, points out that his company doesn’t like bonds and has held this negative view for about a year now. In particular, the company is steering away from BREAK US bonds. However, this does not mean that all is doom-and-gloom in this market. European and Japanese bonds are recovering nicely and there is significant value in these markets.
Aram Compton, Investment Manager at Sarasin, says that the recovery in Europe and Japan is the exact reason that the company is about 6% overweight in equities and that bonds in these areas provide value for the price that you are paying for.
Property outlook
There is significant demand for a long term stable asset as people are spending more time in retirement and need money to fund their lifestyles. For a long time, property has been the cornerstone of this approach, and there is still significant value in property if one knows where to look for it.
Keith Balmer, Global Fixed Income Product Specialist at BlackRock, points out that this value comes to the fore when one is invested in property in the correct manner. There is value to be found in the South African and the UK markets, but there is little to no value in the US market as it is overpriced.
Editor’s Thoughts:
A lot of the recovery hinges on the oil price, which will be driven by consumer demand. All of the investment specialists don’t expect the bottom to fall out of the market and there is enough value in equities to be invested in it as opposed to cash for the medium term future. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
