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Searching hard for new sources of alpha

23 August 2018 Jonathan Faurie

Over the past few years, economies around the world have been going through a roller coaster ride when it comes to recovery from the Global Financial Crisis. During this time, active fund managers have perpetually failed to outperform the market and have struggled to find the alpha that is needed to deliver fund growth to clients. However, this is changing and there is positive news when it comes to an economic outlook from an investment perspective.

FAnews spoke to Nick Kirrage, Co-head Global Value Team at Schroders at the Allan Gray Investment Summit, to find out more about where fund managers can look for good investments. 

Pockets of brilliance

Kirrage pointed out that there is a lot of strong headwinds that are pushing economies forward. He added that while fund managers would be tempted to follow economies that are doing well, they should rather look at the underlying drivers of this growth. 

“It is true that emerging economies have been performing exceptionally well, and that fund managers may be tempted to focus their investments within these markets. And this may see them find significant alpha if they know what is driving this growth. Pockets of brilliance such as commodities, equities, bonds, and to a lesser extent cash, have been the true success stories in these markets,” said Kirrage. 

According to Kirrage, a top performing region has been the UK. This is being driven by a high weighting in areas which are cheap investments. These investments include utilities and supermarket brands such as Tesco. Kirrage also adds that there is a certain element of this performance that is tied to the banking sector. 

A matter of perception

For a long time, equities have been a driving force behind the recovery of many economies. 

However, investors often struggle to classify equities as an always safe or an always risky investment.  

“Equities are both risky and safe depending on the investor’s time horizon. It also depends on the aggressiveness of the investment. Over a period of time, an investor can experience a 50 basis point gain when investing in equities, but they can experience a 20 basis point loss over other periods,” said Kirrage. 

This is because equities are largely driven by supply and demand and can also be affected by the news surrounding a specific company. Facebook is a prime example of this. It was always seen as a strong investment, but this positive sentiment took a knock when the scandal surrounding the company’s involvement with Cambridge Analytica came to light. 

Over time, investors tend to lose money when basing investment decisions on perceived safety. 

This may be because investors become comfortable with the fact that they are gaining profits when investing in areas of perceived safety. 

“What investors need to bear in mind is that profits are driven by demand. It comes down to what an investor pays for a  specific stock and what they sell it for. Overpaying for a stock is an investor’s greatest risk when it comes to determining value,” said Kirrage. 

Look for disruptors

Kirrage later joined a panel discussion at the summit where the issue of stock selection was the focus of the discussion. 

Companies such as Facebook, Google and Amazon are often described as disruptors because they have ultimately changed the rules when it comes to business models within their industries. 

This is also true for the investment market as there has been a lot of interest in these so-called market disruptors. 

“The nature of business has changed, so has consumer behaviour. Consumers are flocking towards these companies because they offer a product and a service that suits their needs. Investors need to look at these fundamentals and take advantage of this interest,” said Andrew Wheatley Hubbard, a Director and Portfolio Manager at Blackrock. 

Kirrage echoed this sentiment by pointing out that these companies are continuously investing in themselves to improve their offerings. This is something that investors have previously taken note of and will continue to focus on in the future. 

Editor’s Thoughts:
Finding alpha has become harder for fund managers. This, added by the fact that more investors are turning towards passive investments, has seen active investing loosing the allure it used to have. Alpha can be found, it’s just a case of searching harder. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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