Trusted investment partners enhance adviser-led outcomes
The explosion of choice combined with unprecedented access to global financial markets makes it difficult for financial advisers to select needs-appropriate funds for their clients. In the past, the task was as simple as scanning a few dozen local unit trusts and selecting an active fund manager that was consistently in the top quartile.
The paradox of choice
Nowadays, it takes hours just to read through a list of the 1800-plus local collective investment schemes (CIS) let alone diving into the approximately 143000 on offer globally. At the recent Curate Investments ‘Exhibiting our Investment Artists’ webinar one of the presenters noted you would have to assess a staggering 394 funds each day to get through the global list, assuming you spread the task over a full year and worked through your weekends and holidays.
“Having options is seen as a good thing; but too many options can quickly become overwhelming,” said Ali Simpkins, Head: Proposition at Curate Investments. She introduced her audience to the main investment styles underpinning the asset manager’s global equity funds and commented on a manager selection process designed to cut through economic and financial market ‘noise’ to focus on what really matters.
“We go beyond performance to assess the thinking behind the numbers and seek out managers with a clearly-articulated investment philosophy,” she said. The preferred active managers must be able to demonstrate unique, repeatable and risk-aware processes. In today’s newsletter, we share standout features of the firm’s global partnerships. Readers should know that Curate’s funds are co-named portfolios administered by Momentum, with Curate acting as the investment manager.
Crunching market data with algorithms
First up, Jan de Koning, a portfolio manager for Rotterdam-based Robeco, revealed that research-driven investment decision making was core to managing quantitative portfolios. “Quantitative investing leverages data and algorithms to construct portfolios designed to deliver repeatable and consistent outcomes,” noted Simpkins. She said that Robeco’s deep research and innovation were integral to Curate’s enhanced index funds.
These are active-passive funds that go overweight or underweight on their index constituents based on factors like momentum, quality, sustainability, value and even analysts’ signals. As one example, investors in the firm’s Global Emerging Markets Equity Fund enjoy a dual benefit of index outperformance thanks to the manager’s qualitative selection algorithm in addition to themed exposure that is impossible to achieve on the JSE.
“This fund offers exposure to sectors including technology, consumer, defensive and energy ... which are underrepresented on the JSE,” the presenter said. At present, the JSE All Share has become a bit of a gold and platinum ‘play’ with mining shares generating around a third of year-to-date returns.
Game changing innovation
Mark Barabau, Head of Global Equity at Jennison and Associates was next to platform an investment style. “We run a Global Growth Equity Fund for Curate and like to target really disruptive and innovative businesses around the world for investing,” he said in a pre-recorded video clip. The idea is to identify game changing companies that leverage innovation to bring exciting new products and services to consumers.
According to Simpkins, they selected this portfolio manager for his ability to find ‘big number’ growth opportunities in e-commerce, Fintech, healthcare and technology. “Over the last 15 years, Jennison have caught the development of the internet; mobile internet; cloud based computing; and, of course, generative AI,” she said.
Success hinges on acting with high conviction the moment the next major growth company is discovered and limiting the portfolio to 35 to 45 such shares. Investors get exposure to companies they love to talk about owning including Nvidia, Microsoft, Amazon, Netflix, Hermes, Ferrari and Mercado Libre. The presenter offered up the fund’s exposure to Tesla to show that high conviction cuts both ways.
“Having a strong sell discipline contributes significantly to fund performance,” she said, commenting on Jennison’s decision to cut Tesla, a strong performer for the fund, around mid-2023. As luck would have it, cutting this share from the portfolio contributed to returns within the portfolio similarly to holding the share prior to the sell decision. The big lesson for wealth advisers and your clients is not to fall in love with a stock regardless of its historic contribution to portfolio returns.
Staying true to quality
The quality investment style was represented by James Knoedler, a Portfolio Manager with UK-based Evenlode Investment Management. “I look for investments which are infinite duration ideally and can generate attractive returns ahead of inflation for very long periods,” he said.
If you find the right company, you do not have to worry about reinvestment risk, roll risk or keeping up with your benchmark. Knoedler’s overarching investment principle is to never compromise on the quality of a company and to ensure it offers durable pricing power based off a clear competitive advantage.
The final methodology up for review relates to the firm’s Global Value Equity Fund, which seeks out opportunities in the cheapest 20% of the market. Simpkins shared long-term data that shows how investing in the lowest priced quintile of MSCI World stocks has outperformed the index by over 5.5% annually since 1974. The conclusion is that “deep value investing, or buying at the steepest discounts, can generate long term alpha” in a portfolio. Lyrical Asset Management, who manage this fund for Curate, are tasked with avoiding cheap value traps.
Lyrical CIO, Andrew Wellington, self-identifies as a bargain hunter scanning the market for stocks that have been ignored or missed. “As a result, we can invest in really good businesses at really cheap prices,” he said, adding that overpaying for a business weighed on returns. Before adding a share to its portfolio, the fund considers three traits: value (V), quality (Q) and Analysability (A). “To avoid the pitfalls of value investing, businesses must be easy to value and simple to understand,” Simpkins explained.
Another ‘value in financial advice’ example
At a practical level this can mean ignoring entire sectors or industries. Bank shares are typically out of favour due to their unpredictable earnings while airlines are taboo due to them being asset intensive businesses. The VQA approach then identifies companies with a higher earnings potential than other cheap shares.
Ameriprise Financial, a US-based financial advice business with over two million clients, was singled out as the type of value opportunity identified using this investment style. It was added to the portfolio at a price-to-earnings (PE) ratio of 13 times compared to the index at around 20 times, and has been a star performer in the portfolio ever since.
“Each of the active managers mentioned in this presentation follows a distinctive investment style being value, quality or growth,” Simpkins concluded. “These styles perform differently through different market cycles but what matters most is that our managers stay true to their core belief system.”
These styles also deliver differentiated portfolios with few position overlaps. There are no common stocks between the growth and value styles, only one shared position across the quality and value portfolios and four in the growth and quality styles.
Writer’s thoughts:
Today’s newsletter highlights how sticking to a defined investment style cuts through the noise and helps advisers make clearer choices for clients. Which style do you find most convincing in today’s environment: value, quality or growth? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
