Knowing where to allocate capital has been an increasingly infuriating prospect for equities investors, with styles coming in and out of favour over the last few years.
In 2016 the value trade outperformed and looked set for a strong period of mean reversion, only for growth stocks to lead the market in 2017. More recently, all funds were hit by the latest market correction.
Overall, judging and timing which style will outperform has proven extremely difficult and as such investors looking to smooth out returns should look to pair two very different strategies to mitigate the risks, according to Psigma Investment Management senior investment analyst Daniel Adams.
“Equity markets have performed very strongly over the past few years, with most global equity markets reaching or exceeding levels that we last enjoyed prior to the financial crisis of 2008,” he said.
“However, within markets we can still find plenty of attractive long-term opportunities to exploit, particularly amongst ‘cyclical’ sectors and growth companies.
“The investment world has become increasingly polarised over the last few years, with investors shunning growth opportunities in favour of high quality ‘defensive’ companies, leaving extreme valuation discrepancies.”
As such, one fund he likes to take advantage of valuation-based opportunities is R&M World Recovery fund.
The five FE Crown-rated fund is run by Hugh Sergeant and despite its deep value approach being out of favour for most of its life, has returned 121.74 per cent since launch in 2013.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
This is 45.74 and 56.93 percentage points above the MSCI All Countries World benchmark and IA Global sector respectively, as the above chart shows.
“Sergeant, has a strong long-term performance track record in ‘value’ equity management and we believe that he is well placed to take advantage of the stark dislocations that we can currently find in global equity markets,” Adams said.
It has been boosted by exposure to areas including Europe and Japan, as, having materially lagged the extremely “en vogue” US, has great long-term catch-up potential, he added.
Indeed, the fund has a heavily underweight position to the US of a little over 12 per cent – compared with the MSCI AC World’s 52 per cent weight – and larger positions in Japanese and, in particular, European stocks.
The fund has a diversified portfolio of 405 holdings but given its strong value-tilt means its return profile can be much lumpier than peers.
Since its launch the fund has been among the most volatile in its sector (13.78 per cent versus the average peer’s 9.31 per cent). It has a yield of 0.71 per cent and a clean ongoing charges figure (OCF) of 1.2 per cent.
As such, it may be too risky for some investors to handle on its own and could use a separate approach to pair with it.
“For quite a good combination we have recently bought the Loomis Sayles Global Growth Equity fund which has obviously got a bias towards tech and growth names that has been very good [in recent years],” Adams said. “Those two complement each other quite well.”
“From a qualitative point of view they are both the most polar opposite. The style position is completely different and geographical location is completely different.”
Indeed, the $73m offshore fund, overseen by Aziz Hamzaogullari, is run with a strong growth bias, as the name suggests, with technology giants Alibaba, Amazon, Oracle Corp, Baidu, Visa and Facebook among its top 10 holdings
The portfolio is much more concentrated with 36 holdings and has no exposure to materials, utilities or telecoms, with overweights to technology and consumer staples.
Its largest weighting is to the US, which makes up 55.3 per cent of the fund, with 25.4 per cent in Europe including UK and 15 per cent emerging Asia.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“Whilst the Loomis Sayles Global Growth fund product is relatively new, the team at Loomis Sayles have a stellar long-term track record running US Growth strategies, with assets of close to $37bn,” Adams said.
Indeed, as the above chart shows, the Loomis Sayles US Research fund – which has a track record dating back to 2001 – has returned 111.86 per cent over 10 years.
Adams noted: “We have been following the Loomis team for some time and have always been incredibly impressed with the rigorous and repeatable process they adopt, which should translate relatively seamlessly to the global mandate.
“We believe that the addition of this growth fund should provide a better balance to existing positions in 2018,” he added. The fund has ongoing charges of 1.75 per cent.
Interestingly however, both funds outperformed last year, following very similar investment journeys.
In 2017, the Loomis fund returned 29.26 per cent in dollar terms while R&M World Recovery returned 20.3 per cent in sterling terms, as the below chart shows.
Performance of funds in 2017
Source: FE Analytics
With currency effects stripped out however, when rebalanced into sterling – though the same holds true in dollars – the Loomis Sayles Global Growth Equity fund has returned 18.07 per cent, less than 2 percentage points difference.
“Interestingly, last year we had a market that went up but you had the two extremes do really well. On the one hand you had the tech names performing well but deep value performed well too,” Adams said.
“While they complement each other in the style they have but actually performed similarly last year which somewhat surprised us.”
Since the Looms fund’s launch in June 2016 the funds have a correlation of 0.67 – with a score of 0.7 indicating high correlation – in sterling terms.
“I suspect over the long term they have got completely different correlations but last year I suspect they would have been quite high distorted because you had the environment where growth did really well while the catch-up trade from deep value [also outperformed] which was quite surprising,” he said.
When both are compared in their native currencies this falls away to 0.02 and is actually negative over the last six months, meaning that as one has risen the other has fallen, showing their diversification benefits.