Avoiding style bias when building a portfolio can translate into strong returns without taking on the risk if a particular style goes out of favour, according to Nomura Asset Management’s Tom Wildgoose.
Growth funds have outperformed a lot over the last few years, and indeed most of the top performing funds in the IA Global sector are growth funds.
However, Wildgoose – who oversees the $34m Nomura Global High Conviction fund – believes he has been able to achieve a similar performance to growth funds while staying style neutral.
He said: “There are several factors that are very difficult to make a judgement on that drive the performance of the different styles, such as growth or value, and we think it's better to stay neutral.
“We are just bottom-up. We try to pick great quality companies when they’re trading well below their intrinsic value.”
He does this by avoiding being excessively exposed to any ‘exogenous economic factors’ and testing the portfolio against shifts in investment styles, which he avoids having a view on.
“We have a view on valuations, company quality, but we don't really have a top-down macro view,” said Wildgoose. “We don't think that's the right way to manage money.”
The focus on valuations was a key reason why before the pandemic struck the fund was running a high cash balance of around 8 per cent at the end of February after trimming positions when the market was hitting all-time highs.
It had nothing to do with their views on Covid-19, Wildgoose said, but he was worried a lot of the fund’s positions were getting up to what he thought was at or above fair and intrinsic value, which proved to be very timely when the market crashed in March.
Last month the fund was trimming positions again, but only in one particular stock, Apple, which made up 9.19 per cent of the fund in July.
“We bought Apple about two years ago when the market was worried about the launch of the iPhone 11, people thought the [market for] iPhones was saturated and growth was stalling.
“We felt that this was a very high-quality company and maybe the iPhone was saturated – maybe it wasn’t – but the services business could really grow well, and was really misunderstood and mispriced by the market.”
The manager bought a lot at that time and the stock has since done extremely well, proving to be a tailwind for the fund’s performance.
Price performance of Apple over 2yrs in US dollars
Source: FE Analytics
He added: “Right now, it’s not a high conviction and we sold quite a lot of that position a few weeks ago, which has proved to be timely.”
Currently, Apple represents around 5 per cent of the Nomura Global High Conviction fund.
One headwind to the fund’s performance however has been its decision not to hold another big tech name, Amazon, a decision that has cost the fund in performance relative to the benchmark, Wildgoose admitted
However, the manager thought it too expensive relative to the quality of the company available.
“We look for quality companies at discount valuation, and we found the valuation was not discounted in Amazon,” he explained.
While few funds were able to predict the coronavirus pandemic, of which Amazon was a huge winner, Wildgoose said if a fund happened to own Amazon and the coronavirus pandemic came along, then they experienced an enormous windfall of performance.
However, he questioned whether this is repeatable for funds that don’t own Amazon, because “the market cap of that company is so enormous”.
“We don't feel that getting lucky [by] owning a whole pile of Covid winners at the moment of the pandemic is repeatable,” he said.
“If everything reverses, we don’t particularly want to benefit from the event that the whole thing reverses, we want to continue to idiosyncratic returns.
“If Amazon were to fall 50 per cent for whatever reason it would tend to be tailwind to us for relative performance because it's such a huge part of the benchmark.”
The Nomura Global High Conviction fund also diverges from the MSCI ACWI benchmark through its preference towards North America, where it has a 70 per cent weighting, compared to a 58.7 per cent weight for the index.
Wildgoose said this is not due to any top-down view but because, from a bottom-up perspective, he tends to find US companies more capital efficient and higher quality.
He said: “Management tends to treat shareholders better, which is why with our quality hat on we tend to drift towards those companies.”
The reason why certain stocks can run as high as 9 per cent of the fund is that its high conviction approach leads to a highly concentrated portfolio, with only 22 holdings currently.
Wildgoose therefore places a strong emphasis on ensuring the companies in the portfolio have economic drivers which are not correlated.
He looks at correlation amongst the stocks and uses factor analysis to assess the likely response of the overall portfolio to exogenous events.
“That is our bottom-up approach to achieving good diversification in what is a very concentrated portfolio,” he said.
Payment services providers Mastercard and Paypal are two holdings which he admitted probably correlate in certain environments, but he looks to limit the excess exposure.
If the fund owned both commodity trading and mining company Glencore and luxury brands specialist LVMH for example, the manager said it would create excess exposure to the Chinese economy, due to the fact that both companies do a lot of business in China.
“Mastercard and Paypal have some degree of correlation, but AO Smith is a company that makes water heaters in the US and China, and Mastercard doesn’t have a business in China, so the correlation between those two companies would be relatively low,” he added.
“Novo Nordisk makes treatments for diabetes and is driven by economic factors completely uncorrelated to either AO Smith or Mastercard.”
Wildgoose also tries to limit excess exposure by running multiple stress events and scenarios on the portfolio to see how it would behave.
He said: “Ideally we are looking for a portfolio that can generate idiosyncratic, stock-specific returns, so that in those scenarios we see relatively limited excess returns negative or positive and over time the stock-specific returns shine through.
“That's why I think you see a relatively limited move in the relative returns in the portfolio in stressed events, but over time you see a good and consistent outperformance.”
Performance of fund vs benchmark & sector since inception
Source: FE Analytics
Since inception in 2015, Nomura Global High Conviction has delivered a total return of 104.13 per cent, compared to 85.77 per cent from the MSCI ACWI benchmark and 76.71 per cent from its average IA Global peer. It has ongoing charges figure (OCF) of 1.1 per cent.