Bottom-up stockpicking fund managers still have to consider general themes and trends and, to a certain extent, macroeconomic factors – even if they might not want to admit it.
That is the consensus view from market commentators and fund managers asked by FE Trustnet, who said that, as thematic investing has become more important than it has ever been, managers need to pay closer attention to new trends than they perhaps would have done previously.
FE Alpha Manager Niall Gallagher, who runs the five FE Crown-rated GAM Star European Equity fund, said: “I think the evidence shows there have been cycles where macro and stock specific factors have dominated the way that shares perform.”
While he does not consider himself to be a thematic or macro-driven fund manager, he said that when making bottom-up investment decisions he still needs to take such factors into account.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“The way that we have always been – and this goes right back to the early 2000s – is we are very bottom up in terms of how we pick the stocks – but obviously structural trends are an important element of forecasting a business,” he said.
“If we are investing for example in LVMH, which has this power brand in Louis Vuitton and also produces Hennessey cognac, then the purchasing power of consumers in China is very important because they are some of the biggest consumers of these products.”
LVMH is the sixth largest holding in GAM Star European Equity’s €271m portfolio, and Gallagher said that the emerging market consumer trend has meant his growth expectations for the stock has risen it into the high single digits rather than low single digits.
“I think if you are a bottom-up manager, you are paying attention to trends. If you are buying a luxury goods stock you are buying it because most likely the superior growth that company will generate because of its exposure to the emerging market middle class consumer,” he said.
“I think you can’t buy a stock without having a view on the business and once you start taking that view you end up to a certain extent thinking about the macro.”
Source: Liontrust Asset Management
Away from luxury goods stocks, Gallagher said that housebuilders and builders’ merchants are another example.
While the competitive position, products and the calibre of management is all important, managers also need to take a view on outside factors such as the overall health of the construction industry or whether housebuilding levels are likely to rise or fall.
“There has to be some element of economic thinking – you can’t divorce the two,” he said.
Square Mile Investment Consulting & Research head of research Victoria Hasler said this is not a new phenomenon, but may help to explain why investors look to fund managers rather than quant-based products.
While thematic-based exchange-traded funds (ETFs) offer investors the chance to invest in themes specifically, she said that bottom-up stockpickers will look at things in a different light.
“I think there is a difference between bottom-up stockpicking and people who say they are trend investors because trend investors tend to identify a trend and look for companies that fit that,” Hasler said.
“So they won’t necessarily be buying the 100 best companies; there may be a company that they think is much better than the one that they’ve bought but that the trend is stronger and therefore that stock will do better.”
Conversely, the true bottom-up stockpicker would in theory buy the best companies that he or she likes the most regardless of the strength of its fit within a theme.
Yet even so, themes probably influence managers’ thinking as it is human nature to research something more heavily that has piqued their interest, she said.
Hasler noted: “If you do work on Unilever and think it will really benefit from the Chinese middle-class and believe it is a strong theme, then even without thinking of it as a theme you may start to think about what else could benefit.
“I don’t see how you would stop yourself doing that because it is human nature. If it piques your interest you will go and look at something similar.”
Liontrust multi-manager John Husselbee said that themes are now more important than they have been in previous years thanks to globalisation.
“You have got to be more aware of the local and global competitors,” he said.
However, he said some managers who say they do not look at themes and macroeconomics can be “frustrating”.
“How can you not have a view on those trends and directions like growth, inflation – a dashboard of basic economics – and not then pick stocks within that?” Husselbee said.
“But I think where some of the confusion lies is some people are looking for a macro or tactical allocation call when I think some [bottom-up] managers are not prepared to put their head above the parapet on because it is not what they are paid to do.”