Fund managers focused too heavily on macroeconomics could be missing out on what is really happening in markets, says Ian Heslop, head of global equities at Old Mutual Global Investors.
While many have tried to predict the potential impact of extraordinary political events of the past year, such as Brexit and the election of Donald Trump as US president, managers should instead focus on what happens in markets, the manager argues.
“If you’re an equity fund manager you don’t get any points for knowing when the Fed are going to raise rates,” he said.
“A lot of people had [their] best year and performed very well, but many people were caught out. They would have got the macro correct but got the market wrong.
“Markets are not behaving in the way [many] expected. For us it is more important to understand how the market is behaving.”
Heslop says it is part of the OMGI global equities team’s job to understand whether investors are happy or not as sentiment will more often dictate the types of stocks that they buy.
The fund manager says the market environment had completely transformed by the end of last year, as risk appetite returned and volatility in the markets settled.
The approach has worked. In the three years to 13 February 2017, the four crown-rated, £533.8m Old Mutual Global Equity fund has returned 70.95 per cent, compared with a return of 41.77 per cent for the average peer fund from the IA Global sector and a 55.37 per cent for the MSCI World index.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
“We work quite differently, not just from the rest of the guys [at Old Mutual], but also other fund managers,” he explained.
Without a house view or chief investment officer, the global equity team takes a different approach from the firm’s well-publicised UK team, led by CEO Richard Buxton.
The fund eschews the more concentrated style employed by high conviction managers and has more than 500 holdings in the current portfolio.
The process is also style-agnostic, with Heslop saying a preference for one style or another could lead to a reduced ability to beat the index in some market conditions.
“It isn’t about individual stocks, we’re proactive: it isn’t an index-type product,” he said, adding that the number of stocks help contribute to more consistent performance.
“We’re not wedded [to the quality style] and we like growth. We’re very interested in companies that are accurately priced because they are growth companies. We’re not interested in the standard way of thinking about growth.”
While markets have seen strong rises more recently as stock prices, particularly in the blue chip part of the market, Heslop says it has not changed its approach to investing.
“It’s nothing different to what any other managers are doing. We’re interested in whether companies are expensive… we have got to know not whether it is cheaper, but whether its relevant how it is going to perform [in the future],” he said. “You can buy high risk but quality firms, [but] it doesn’t always work.”
Performance of manager vs peer group since December 2001
Source: FE Analytics
The emphasis on understanding the market is brought together with an in-depth look at company data, says the manager.
“We don’t buy the companies we buy shares in the companies,” explained Heslop.
The four crown-rated, £1.8bn Old Mutual North American Equity fund also falls under the management of the global equity team.
Its performance has been impressive. Over 2016, the fund returned 36.74 per cent, compared with a 33.09 per cent gain for the benchmark MSCI North America index and a 29.31 per cent gain for the average IA North America fund.
Performance of fund vs sector & benchmark in 2016
Source: FE Analytics
Like the global equity fund, it has a highly diversified portfolio of more than 200 holdings. The fund’s largest positions include Amazon.com and Apple, representing 2.30 per cent of the portfolio. Although the top five holdings account for less than 10 per cent of the total portfolio holdings.
“Turnover is high [on the funds], higher than you see elsewhere for long-only funds,” he said.
Heslop says while the questions might be raised over the potential to deliver alpha, the portfolio diversification approach does give it some room for manoeuvre.
“It’s a flexible portfolio over time, it’s very rare that we will close a fund position in one trade,” he said. “There is no messing around [though], when the stock stops being good we remove it from the portfolio.”
Making many small trades, the team are able to keep execution costs low. Both the Global Equity and North American funds have an ongoing charge fee (OCF) of 1.00 per cent.
Not adhering to a high conviction approach also mean that portfolio positions are much smaller and easier to divest, he adds.
Looking ahead, the manager says while there may be further headwinds for markets, performance in 2017 has so far produced similar conditions to the end of last year.
“Volatility is low, [investor] sentiment is positive, risk appetite is positive,” he said. “It’s an environment that is more conducive to equity markets rising.”
While valuations may be more expensive, the manager says that its approach to investing will not change and that there are good opportunities for stock selection whether markets continue to outperform or not.