By IMAP Team
Global equities are one of the key drivers of returns for managed account portfolios, but at a time when global indices are down around 20 per cent year-to-date, managing this part of the portfolio is particularly challenging. Andy Gardner (Fiera Atlas Global Companies), Alex Ventelon (Morgan Stanley), and Daniel Stojanovski (Centrepoint Alliance) discuss their approach to navigating uncertainty with this asset class.
Coming off a reasonably strong earnings season doesn’t mean that positioning portfolios in an inflationary environment comes without its challenges, says Daniel Stojanovski - Head of Research at Centrepoint Alliance. Speaking at the IMAP Independent Thought Conference in Sydney, Daniel says part of this challenge is how portfolio managers approach value and growth as part of the portfolio construction process.
“When it comes to value versus growth, we want to travel between them both. You can tilt between them, and in managed accounts you have the ability to tilt between one style versus the other, depending on shorter term economic environments - and not as an alpha generator, but as a risk control measure,” says Daniel.
However, he adds that more than anything, you need to understand the process of the underlying manager and what they are trying to achieve.
“Our approach is not to choose one style over the other, because no one has the magic answer about what’s going to happen moving forward. You need different styles and both extremes (value and growth) within a portfolio in terms of how much volatility you are willing to take. This includes blending those extremes with other styles and asset allocations within your portfolio.”
The Executive Director, Head of Research and Investment Strategy at Morgan Stanley Australia Wealth Management, Alex Ventelon, supports Daniel’s view about having a blend of growth and value.
“Right now, it’s about quality, but go back a few years, and it was a relatively easy decision to be long growth. But we have decided to go long value. So, currently we are deep value, lower quality buckets,” he says.
“However, to still outperform, you need help from the cycle, but we’re currently not getting that. That means the low quality end of the value bucket will likely underperform, and similarly within growth, low quality stocks and companies that depend too much on valuation expansion will underperform as well. So, you want to have a blend of both growth and value.”
Alex adds that in both styles, portfolio managers need to have quality companies, which he says is an easier job to do when direct stock picking, compared to when you’re only allocating to either funds or ETFs.
At Fiera Atlas Global Companies, Andy Gardner CFA - Portfolio Manager Global Equities - admits to having had many client discussions recently about making tactical decisions and re-allocating to buckets. With the growth sell-off, Andy confirms it has presented Fiera with plenty of opportunities to invest in good quality value companies. However, he does say that it really comes down to the individual company.
“We’re always looking at the underlying profit, which is stable and resilient, and being able to expand that over time. By doing so, we’ve been able to allocate a little more to the actual holdings in our portfolio,” says Andy.
“Over the past two years, multiples went crazy post COVID. Now, companies are priced with much more attractive valuations. So, that’s the type of opportunities we’re looking for. It is similar to what happened in Q4 of 2018, when there was a big rotation that was price-led in a risk-off environment.”
According to Andy, when you have big dislocations and rotations happening in the market, that’s when you can expect to see activity from Fiera, as it seeks out investible opportunities.
Alex Donald, Andy Gardner, Daniel Stojanovski, Alex Ventenon
No company is immune from a slower economic environment, so as a portfolio manager, it’s necessary to frequently assess companies to ascertain the degree to which you are exposed. Also, if we were to go through a prolonged period of downturn, or if inflation was to continue at a much higher level, you need to be aware that the overall market still probably has some valuation risk in it. So, we still evaluate every company in our portfolio on an individual level
Portfolio construction
When it comes to portfolio construction, Andy reveals that individual companies are assessed daily at Fiera to ensure they still have resilient cashflows, as that’s the reason they’re in the portfolio in the first place.
“No company is immune from a slower economic environment, so as a portfolio manager, it’s necessary to frequently assess companies to ascertain the degree to which you are exposed,” he says. “Also, if we were to go through a prolonged period of downturn, or if inflation was to continue at a much higher level, you need to be aware that the overall market still probably has some valuation risk in it. So, we still evaluate every company in our portfolio on an individual level.”
This evaluation includes stress-testing cashflows and multiples. Only if the company is able to satisfy this evaluation, will Fiera maintain the investment.
Like Fiera, when it comes to investing at Centrepoint Alliance, it’s all about the philosophy. Daniel confirms that risk premia is a part of the philosophy, with certain investment styles and asset allocation, like small caps, linked to the risk premia.
“We believe that if you can have an investment style linked to risk premia in Australian equities, then why shouldn’t you have it in global equities as well?,” he says. “We look at the type of managers available in the universe and pick the ones whose processes we are comfortable with. We’ve always had discreet exposures to small caps because it makes sense to have them.”
Morgan Stanley takes a granular approach to small caps. This enables it to be aware of the impact that certain allocations might have at a portfolio level. It also considers whether the environment is more conducive to active management versus passive investing.
“We have our own framework for that, where we look at a range of criteria. This enables us to come up with a high probability of managers outperforming in that environment over the next 12 months,” says Alex. “Some asset classes are better suited to active management, while others are not. So, the environment does matter when considering the style of management we go with.”
We believe that if you can have an investment style linked to risk premia in Australian equities, then why shouldn’t you have it in global equities as well?,” he says. “We look at the type of managers available in the universe and pick the ones whose processes we are comfortable with. We’ve always had discreet exposures to small caps because it makes sense to have them.
Structural reforms in a number of emerging markets will be extremely painful but with improved governance, efficiency, competitiveness and innovation of companies, we believe this will help make the sector more attractive to investors. However, geopolitical issues still loom large in a number of regions, which remains a concern.
Emerging markets
Daniel confirms that Centrepoint does have a discreet allocation to emerging markets in global equities. However, he adds that Centrepoint is reliant on the manager making decisions with these equities that are in alignment with Centrepoint’s investment objectives.
“We approach emerging markets by having a discreet exposure. This allows us to use it as part of a broader strategy, which allows the manager to go in when they see value and exit when the fundamentals of the underlying company change,” says Daniel.
“Remember, as an asset class, emerging markets have a discount on the valuation because governance is really lacking in some of these countries and the companies domiciled there. So, when looking at emerging market valuations over the last 15 years, compared to developed markets, they’re probably what we expect.”
Alex agrees with the discount on the valuation. He says it’s very often justified by a lower return on equities, and makes a similar comparison to U.S. equities versus European equities, where there is a considerable gap in terms of valuation.
“Structural reforms in a number of emerging markets will be extremely painful but with improved governance, efficiency, competitiveness and innovation of companies, we believe this will help make the sector more attractive to investors. However, geopolitical issues still loom large in a number of regions, which remains a concern.”
As such, Morgan Stanley maintains no direct exposure to emerging markets, but it remains a sector that it is carefully considering.
Undoubtedly, there are a huge number of companies in emerging markets, which greatly exceed those in the developed market MSCI World Index. When Fiera considers emerging market companies, it identifies sectors of the market where investors can still get good growth, like consumer staples, compared to developed markets, where growth and competitive advantages have been worn away.
“For Godrej - a consumer staples company in India - the headline level of revenue growth is 10 per cent, which is great. Express that in U.S. dollars over a 10-15 year period and it’s actually 4-5 per cent,” says Andy.
And what about China? He acknowledges that whilst there are geopolitical issues, it’s a market that’s simply too big to ignore.
“There are 1,300 companies listed in China, compared to about 1,600 listed in the U.S. and 900 in Europe. China is an enormous market and while we only have about two or three holdings there, they are domestic-focused companies.”
Andy accepts that to operate in China means that companies need to be onside with the geopolitics of the country, as the Chinese government can exercise its considerable power more quickly and forcibly than in developed countries.
“This means there are certain areas of the economy that we deem too risky to invest in. If you’re not in line with China’s Common Prosperity policy and social cohesion, then you’ll probably be in trouble in China, so you need to be careful,” he says
We have our own framework for that, where we look at a range of criteria. This enables us to come up with a high probability of managers outperforming in that environment over the next 12 months. Some asset classes are better suited to active management, while others are not. So, the environment does matter when considering the style of management we go with
Thematic ETFs
Thematic ETFs are increasing in availability, and Daniel believes ESG-themed ETFs do have a place in a portfolio. He explains: “Where clients have a specific ESG objective, we view it as a satellite approach. You have your core part of the portfolio but then you have the ESG satellite with the thematic play that the client requested.
“You can also use thematic ETFs for specific tilts if you can’t get them from other managers. I do think these thematic ETFs do have a place in a portfolio, but ultimately, it depends on what you’re trying to target and how much risk you are willing to take.”
Alex cautions that thematic vehicles, like ETFs, very often carry risk exposure that can be quite extreme.
“When the tide turns, they can hit you fairly hard and turn out to be extremely correlated with other thematics that are labelled differently. And that’s something that bothers me.”
About
Andy Gardner CFA is Portfolio Manager Global Equities at Fiera Atlas Global Companies;
Alex Ventelon is Executive Director, Head of Research and Investment Strategy at Morgan Stanley Australia Wealth Management; and
Daniel Stojanovski is Head of Research at Centrepoint Alliance.
They spoke on ‘The role of global equities in portfolio management’ at the IMAP Independent Thought Conference - Sydney.
The session was moderated by Alex Donald - Head of Funds Management, Director at Ironbark Asset Management.