Investec makes the right calls on asset classes, regions
INVESTEC GSF GLOBAL STRATEGIC MANAGED FUND
Raging Bull Award for the Best Offshore Global Asset Allocation Fund – the top-performing fund on a risk-adjusted basis over five years to December 31, 2012
The right choice of asset classes and geographic regions during the tricky economic conditions that followed the financial crisis in 2008 earned Investec’s global asset allocation fund a Raging Bull Award at this year’s award ceremony.
Among the offshore funds approved by the Financial Services Board as those that can be marketed to South African investors, the fund was the leading global asset allocation fund on a risk-adjusted basis over the five years to the end of December last year.
It earned five PlexCrowns and the highest score among its peers and returned 4.4 percent a year over the past five years, according to ProfileData.
The manager of the fund takes into consideration both macro-economic factors (a top-down investment approach) and factors that affect individual shares or securities (bottom-up approach) when making asset allocation calls.
The focus on specific securities is complemented with themes that are identified as likely to do well, London-based fund manager Philip Saunders says. These themes may focus on market sectors, regions or even market capitalisation factors, he says.
The first year of the five-year period to the end of 2012 was marked by the global financial crisis.
Before the crisis the fund had reduced its equity exposure to below 60 percent and had increased its bond exposure to 42 percent. The fund is confined by its mandate to an equity exposure of 75 percent.
However, Saunders says the fund had a “rough time” in the last quarter of 2008. The fund had started to build a strong position in global corporate bonds, with less exposure to government bonds, he says. Immediately after the crisis, corporate bonds behaved like equities and fell dramatically, Saunders says.
After this bad start to the five-year period, the fund had a “tremendous” 2009 and 2010 as its investments in corporate bonds and more defensive shares paid off, Saunders says. In those years, the fund’s equity investments were in quality stocks, with a focus on global franchises such as Coca-Cola and Proctor & Gamble, and it avoided out-of-favour shares, such as banks.
Saunders says Investec was comfortable to be in quality stocks, because they became incredibly cheap in 2009 as investors sold them off in large amounts.
The earnings of quality shares recovered strongly after the crisis, so they performed extremely well for the Global Strategic Managed Fund as the world “climbed a wall of worry” about the macro-economics of developed countries – the eurozone, in particular – and a slowdown of growth in China.
In 2011, global financial markets experienced a correction rather than the expected continued expansion that typically follows a recession, Saunders says.
Although equity returns were modest in that year, Investec maintained its positions in both the equity and corporate bond market, because it took the view that the bull market would resume.
Last year, however, Saunders says Investec decided to adopt a bolder position and gradually moved away from some of the defensive shares into more cyclical stocks that Investec believes will do well in the years ahead.
It moved back into the bank and emerging market shares that it avoided in the earlier part of the past five years. This move was rewarded with a return of 15.67 percent for the year to December 2012 (according to ProfileData).
Over the past year, the fund has reduced its exposure to United States stocks – at one point more than 50 percent of the fund was in these shares – and increased its exposure to Japan, Asia (excluding Japan) and emerging markets.
At the end of December, the fund’s equity exposure – at close to 70 percent of the fund – was 42.6 percent invested in the US, 11.5 percent in the United Kingdom, 15.7 percent in Europe, 8.9 percent in Japan, 11.4 percent in Asia (excluding Japan) and 9.9 percent in emerging markets.
Saunders says he expects the Global Strategic Fund’s exposure to Asia and emerging markets to continue to increase at the expense of exposure to shares in the US.
Although Investec is still finding good shares in the US, he says the manager expects to do better in Asia and emerging markets, because these markets are in a different phase of their economic cycles to the developed world, do not have the economic problems that the developed world has (such as debt and ageing populations) and the cost of capital has fallen significantly.
The US is recovering well from the global financial crisis, and there has been a material increase in economic activity there, Saunders says. Many of the big risk factors have moderated and the leading indicators look more positive, he says. “We are entering the expansion phase and can expect reasonably attractive equity returns.”
There are still risks, however, Saunders says. For example, financial markets are behaving as if there has been an improvement in Europe, whereas no fundamental changes have taken place.
The UK still needs to undergo some deleveraging (reducing its debt), and this will put a lid on growth there, Saunders says.
Also, interest rates may begin to normalise, with the US raising its interest rates earlier than other developed countries, he says. This could present “a bump in the road” for bond and equity markets, Saunders says, but it will be part of the normalisation of developed market economies.
Another risk is that the Chinese growth cycle is turning, he says.
Investec is nevertheless encouraged about the prospects for equities and corporate bonds, Saunders says.
Investec manages the currency exposure of the fund separately. This process has the fund mostly exposed to US dollars – 58.9 percent of the fund – because Investec is of the view that this currency will perform well, Saunders says.
The fund’s exposure to developed market government bonds – at 11.4 percent at the end of last year – is at a very low level relative to the fund’s history, but after a 30-year bull market it is difficult to regard bonds as a defensive investment, Saunders says.
The fund’s bond exposure is mainly in corporate and infrastructure bonds, rather than government bonds.