Bypassing the irrationality of markets is one of the most rewarding things an investor can learn to do, according to Sarasin & Partners’ Lucy Walker (pictured). 
The manager, who co-runs two five FE Crown-rated funds – Sarasin Fund of Funds Global Strategic Growth and Sarasin Fund of Funds Global Equity – says that active management is vital to achieve long-term returns due to the inefficiency of markets.
She believes that their performance is fuelled by overreactions which, if picked up on, can present stellar investment opportunities at attractive valuations.
“The first [market] bias that we believe is often present in human behaviour is overconfidence. You might think that you’re an above-average driver, but actually most people think they’re above-average drivers and of course that isn’t possible. So we believe this means that investors tend to have too much faith in their gut instinct or indeed in their calculations,” she explained.
“So we would suggest that it’s always sensible to be self-critical and not just this, but to have the structures in place to ensure you are self-critical because it’s an easy thing to say but a harder thing to do.”
The second factor that sways market performance is confirmation bias, according to Walker. By this, she means that, if someone has left-wing views for instance, they are likely to buy a left-wing paper.
The manager believes that the impact this behaviour has on financial markets means the investor is only exposing themselves to information that correlates with their own views.
“What this means is you might miss something that is very valid that disagrees with your view,” she continued.
“Interestingly, even if you do read something you disagree with, you’re more likely to disassociate yourself from this information. As a team we actively seek out alternative views and we have a devil’s advocate part of the process which we thing helps to minimise this.”
The final investment pitfall that Walker avoids is the herding instinct and the desire to know where everybody else is buying before increasing exposure to certain areas of the market, which has the tendency to exaggerate market cycles.
Side-stepping these inefficiencies and maintaining a contrarian stand-point has led Walker to invest in a number of funds that haven’t always been top-quartile or seen large inflows, but have specific traits that the manager finds desirable.
One such example is Paul Chesson’s three FE Crown-rated Invesco Perpetual Japan fund, which was bottom-quartile when Walker and the investment team bought it three years ago.
“We hold an investment policy committee - we have these every six weeks and it’s there so we can determine any key views we might have. These are where we have a very strong view – a good example would be that we are very overweight Japanese equities,” the manager said.
“In November 2012 we had a key view that Japanese equities would outperform and the yen would depreciate. You might remember at the time that [Shinzo] Abe was very likely to get elected in Japan and he had a very strong rhetoric about ending the economic stagnation that Japan had suffered with for a long time. The only way he could feasibly do that would be inflating the economy and deflating the currency.”
“When we researched the universe, we were able to find a fund that we thought would be best placed to exhibit that sort of environment and behaviour.”
The reason Walker chose to invest in Chesson’s fund was that it held a substantial number of exporters in its portfolio, which were likely to benefit from currency depreciation.
After meeting the manager and confirming these positions were still in place, the team at Sarasin & Partners was then able to move overweight Japan, benefitting from the fund’s appealing valuation, and hedge against the yen.
Over Chesson’s 15-year tenure, the fund has outperformed its peer average in the IA Japan sector by 30.62 percentage points, returning 18.34 per cent.
Performance of fund vs sector over management tenure
Source: FE Analytics
However, the £316m fund has found itself in the bottom decile in four out of 15 years – in 2005, 2010, 2011 and 2014.
These waves of underperformance, though, can provide the perfect opportunity to buy into funds with truly skilled managers who have been unlucky over the short term, according to Walker.
Another one of the manager’s holdings, Legg Mason Opportunity, has fallen in and out of favour with investors since its launch in 2009. In spite of the majority consensus, Walker has been consistently bullish on the fund because of manager Samantha McLemore’s high level of skill.
“The performance has waxed and waned and there have been times where you’ve wanted to own the fund and times when you haven’t. But importantly, over that time period, the manager’s skill has remained consistent,” she explained.
“Of course there were chances to pick up the manager at the opportune moment such as 2009 or 2012, and to be selling at those moments when the manager has done very well. We do think this provides us opportunities to pick up managers when they are out of favour, and equally we‘ll monitor this closely to ensure we are making the right decision.”
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
When selecting the right manager, Walker looks at three primary traits in addition to performance: culture, experience and process.
C.T. Fitzpatrick, who has managed Vulcan Value Equity since its launch in 2013, is held in particularly high regard by the manager. In fact, his fund is the third-largest weighting within the Sarasin Fund of Funds Global Strategic Portfolio and is held across all four Sarasin fund of funds.
“The first box [he ticks] is culture – Vulcan has a very strong history of soft-closing its funds. That is to say that when the fund gets too big for its strategy [the team] are unwilling to accept new money. In doing so it protects existing investors and we think this is a very good feature of a fund manager because it suggests that they are there for existing investors,” Walker pointed out.
While Fitzpatrick hasn’t run the fund for a particularly long time, he has built up an extensive track record at Southeastern Asset Management over approximately 20 years, during which time he delivered significant outperformance.
As such, Walker says that she was able to determine whether or not the manager was skilled, which she believes he is.
“In terms of process, it’s very much a high conviction portfolio – that turnover of less than 20 per cent is what we’re looking for, and they’ve got a high active share so they’re different from the benchmark. Fitzpatrick really ticks a lot of boxes,” she added.
Over Sam Jeffries’ tenure, who was joined by Walker less than 18 months later, Sarasin Fund of Funds Global Strategic Growth has returned 27 per cent, outperforming its peer average in the IA Mixed Investment 20%-60% Shares sector by 5.17 percentage points.
Performance of fund vs sector over management tenure
Source: FE Analytics
The fund has a clean ongoing charges figure of 1.22 per cent.