On Friday, the Fund Selector Summit, organized by Funds Society and Open Door Media, saw its second and final day, in which six managers explained their different perspectives of investment in equities and fixed income: Henderson, Carmignac, Robeco, Old Mutual, Lord Abbett, and Schroders analyzed different strategies with which they seek to generate returns in the current environment.
The day’s events were preceded by a conference by Javier Santiso, Vicepresident of ESADE’s International Centre for Economics and Geopolitics, in which he explained how a new world is emerging, with two background forces: the technology and digitization wave, and the growing importance of emerging markets. "The change in the wealth of nations is also related to digitization and technology, an issue which is also linked to the emerging world and its growing strength, and which has the potential to change the world and create disruptions in all sectors, including asset management," Santiso explained.
For this expert, digitization is essential as an element which shall determine the future wealth of nations and he advised asset management professionals that they must not only take into account macroeconomic and microeconomic indicators when selecting their investments, but also the progress in digitization of the different markets. And he warned: management companies’ biggest competitors may be in companies like Facebook or Google rather than in other management companies. Santiso concluded his presentation with his vision of how Latin America is positioned in this environment.
The investment solutions presented at the conference covered various assets. In fixed income, Brian Arsenault, Leveraged Credit Investment Strategist at Lord Abbett, explained how in a world "starving for yield" it’s still possible to obtain returns on fixed income. The key? Flexibility, which they apply to negative duration funds in preparation for a rising interest rates environment, or high yield products, an asset which he still considers attractive in the US, even though he admits that spreads have fallen as compared to the past, and valuations are somewhat tighter.
The expert also spoke of his multi-asset fund with income prospects which may have up to 20% in equities: although it is focused on high yield, which occupies more than half of the portfolio, and in investment grade credit (over 20%), equities currently weigh almost 15% (the maximum is 20%), especially in mid-cap firms. Stock market investments, rather than seeking dividends, focus on shares which have a short-term appreciation catalyst, for example, US energy companies, with preference for natural gas over oil, which he doubts has a sustainable rally due to increasing supply. Some companies in the technology and healthcare sectors may also be interesting, because they have corporate movements as catalyst and can be bought. "When we like a company very much we study it from the point of view of bonds, loans, and equity, and can enter any of them, several, or all. We will go where we see value," he added.
Regarding the last sell off in European public fixed income, he claims it's normal because "growth is coming". In his opinion, most of the market is focused on what the Fed does, but "we must also look to the European Central Bank."
In equities, Justin Wells, Investment Director at Old Mutual Global Investors, explained their different investment style, which is focused on exploiting market inefficiencies: "We use the stocks as commodities to extract alpha over a period of time," he explained, “in order to achieve uncorrelated returns.” Because, in his opinion, diversification and decorrelation are no longer achieved by investing in global stock markets or in a portfolio of stocks and bonds ... at least in the short term, or at certain times. Their investment process is committed to a diversified portfolio in which stock selection is based on five criteria, or sources of alpha: valuation, sustainable growth, management of the company, as well as on sentiment analysis and market dynamics (momentum): "The trend is your friend, we are not a private equity, we want to extract alpha from the market". According to these five criteria, they allocate scores to each stock, on the basis of which they construct the portfolio. They are currently more positive with the US stock market than with the European or Japanese, where the general feeling is more positive.
Meanwhile, Robeco focused on its factors investment strategy applied to its emerging market fund, Robeco Emerging Conservative Equities. "Factor investing is here to stay; assigning depending on factors rather than assets is generating increasing interest," said Michael McCune, Client Portfolio Manager at Robeco. The expert stressed value, momentum, and low volatility, especially the latter, as key factors. "Factor investment works very well in emerging markets." Nevertheless, the company uses the same strategy in global US, and European stock funds. The management company has launched the European stock market version (Robeco European Conservative Equities) with hedged currency.
Nick Sheridan, Manager of Henderson Euroland Fund, stressed that the Euro zone is currently one of two developed markets with greater discount, and it is clear that "if you buy in cheaper markets, your chances of obtaining returns will be greater". Remaining true to their investment style, Sheridan explained that the European stock market without financials "is still extremely cheap." Among the reasons is the poor appetite for assets: "Everyone is disappointed with Europe and does not believe in growth because the continent has disappointed in the past. In addition, investors have favored growth stocks rather than value," he says; something which favors current market valuations. But he believes there will be more growth in Europe than that which has been anticipated. "Europe is very cheap and the reasons why the market has been cheap will change," he added. The greatest risk: Greece’s default.
Muhammed Yesilhark, Head of European Equities at Carmignac, explained their investment philosophy which sets them apart from the competition and with which they manage products of either large caps (Carmignac Portfolio Grande Europe), medium and small caps (Carmignac Euro-Entrepreneurs), or diversified strategy (Carmignac Euro-Patrimoine). "We are pure stock pickers, which is somewhat different from the management company’s top-down strategy." Their strategy is based on bottom-up analysis, fundamental, value-based, and focused on turning points. They also believe in discipline and simplicity and all their investments are made from an absolute rather than from a relative point. Finally, it has limited downside risks.
To build the portfolio, with 40 to 60 securities, and a minimum 30% upside potential, they follows three steps: generate ideas; build portfolio (which is based on four sections based on their belief in the securities: core longs, trading longs, relative value and special situations, and alpha shorts), and risk management. "The portfolio tells me that we are in a late phase of the expansion cycle, even though the press talks of recovery. I do not have enough core longs in the portfolio" he said.
Schroders provided the vision of alternative management, with its liquid hedge fund platform, GAIA, a segment in which they see increasing potential. Andrew Dreaneen, Head of Schroder GAIA Product & Business Development, pointed out three liquid alternative strategies for this year which may offer protection and which are within the platform: "Investors are concerned about the situation in equities and fixed income, they seek diversification and want downside protection," he said. So he highlighted three funds that even in the market’s worst moments are able to offer protection, including positive net exposure.
The products are Schroder GAIA Sirios US Equity (a long short US equity fund which provides protection against falls); Schroder GAIA Paulson Merger Arbitrage (offering adjusted returns at higher risk, decorrelated with the markets and in 50 of the 51 S&P bear months they have managed to beat the index) and Schroder GAIA KKR Credit (a fund of absolute return focused on credit and long short perspective which invests primarily in Europe and in the high yield market. Normally with very little net exposure, neutral market). In total, Schroders GAIA has 6 strategies (4 external, adding Egerton to the three aforementioned), and two of the management company.