Multiple strategies enable fund to select the right equities

The Old Mutual Global Equity Fund’s highly pragmatic approach to stock selection continues to produce superior performance for its investors. This is the fifth year in a row that the fund has won the Raging Bull Award in the rand-denominated global equity general sub-category.

The fund achieved an annual average return of 15.29 percent (in rands) over three years, according to ProfileData. The benchmark for the global equity general sub-category, the MSCI World Index, returned an average of 11.33 percent a year over the same period. The 30 funds in the sub-category with a performance history of three years returned an average of 10.61 percent a year.

Global equity general funds must invest at least 80 percent in equity markets outside of South Africa at all times.

The fund has proved to be a consistent performer over the long term: achieving the best return (12.89 percent versus the MSCI’s 9.56 percent) over 20 years; 9.06 percent (versus 4.68 percent) over 15 years and 22.15 percent (versus 15.65 percent) over seven years. It was also second-best over 10 years with 12.24 percent (MSCI: 8.59 percent; the top-performer: 13.25 percent).

The Global Equity General Fund also received the certificate for the best South African-domiciled global equity general fund on a risk-adjusted basis over five years to December 31, 2016. The award of five PlexCrowns in the global equity general sub-category means it delivered the best consistent returns without too much risk.

The fund is a product of Old Mutual Global Investors (OMGI), based in London. Its managers are Ian Heslop, the head of the global equities team at OMGI, Amadeo Alentorn and Mike Servent.

The team uses five strategies to identify shares that are mispriced – in other words, companies whose share prices are not a true reflection of their inherent value. The strategies are:

• Dynamic valuation: identifies shares that are undervalued, although the companies have strong balance sheets.

• Market dynamics: identifies shares that will benefit from economic trends, but whose prices do not reflect the expected benefits.

• Sustainable growth: identifies companies that have strong growth potential that is not reflected in the share price.

• Analyst sentiment: identifies shares that are likely to do well, although that is not reflected in the shares’ prices.

• Company management: identifies companies with strong management teams.

“We look to understand if a particular stock is likely to out- or under-perform its index by incorporating company-level information,” Heslop says.

“And we don’t stop there, recognising that we do not actually buy companies, but shares in companies. The view on the stock is then a blend of these different views, which changes over time to reflect how the market is currently deciding which stocks to buy.”

Asked which strategies have been particularly dominant over the past three years, Heslop says: “Dynamic valuation has been strong over the period, even though value itself has been anything but consistent. We have managed this mainly due to our ability to capture the short periods in the past three years when buying cheap was a good idea.

“Analysts’ information has also been useful, because they give us clues as to which companies have something happening to them and whether we can make a profit from it,” he says.

Heslop says the team does not take large country, sector or stock positions, because country and sector biases introduce a lot of risk. Instead, the team seeks “to understand what type of market we are in by measuring what markets are doing. We then look to understand what types of stocks are likely to out-perform. We also recognise that nothing works all the time, so a diversified-style fund has a higher likelihood of consistent out-performance.”

This year will continue to be an uncertain one for investor sentiment, Heslop says. A number of elections in Europe, together with the “Trump effect”, could result in changes to investors’ appetite for risk.

“Using macro or geopolitical forecasts will continue to be difficult, as investors struggle to link the event with how the market will react to the event. In this type of environment, it is more important than ever to take care with top down, macro portfolio placement. We are more interested in how the market is behaving than in any explicit macro forecast.”

The minimum investment amount is a lump sum of R10 000 or R500 a month. – Mark Bechard

Investing in shares, bonds, listed property or cash on the basis of their price in the investment market relative to their future performance earned Nedgroup Investments the Raging Bull Award for the best global flexible fund.

The Nedgroup Investments Global Flexible Fund’s United States dollar returns stated in rands were 19.22 percent a year over five years to the end of December last year, according to ProfileData, while outperforming 40 of the 41 Financial Services Board-approved funds in ProfileData’s category for global flexible funds.

The top performer on straight performance was the Contrarius Global Absolute Fund (Ireland), with an annual return of 20.27 percent over five years, and the average annual return of the category was 16.27 percent. But Raging Bull Awards for multi-asset funds are made on the basis of riskadjusted returns as measured by the PlexCrown Ratings, and on this measure the Global Flexible Fund was the leader in its category.

Nedgroup Investments outsources the management of its funds to what it believes are the best-of-breed managers. The Global Flexible Fund is outsourced to a US investment manager, First Pacific Advisers, which has managed the fund since June 2013.

The fund manager may invest across asset classes without restriction, but First Pacific is a bottom-up value manager. This means it does not start by selecting how much to invest in each asset class, but looks at securities across the asset classes and selects them on the basis of their valuations – or future earnings relative to price.

One of three managers for the fund at First Pacific, Brian Selmo, says, when picking equities, the fund looks for quality multinational companies that are likely to deliver good returns.

It looks for companies that have a “competitive moat” that keeps them safe from losing out to their competitors and ensures that they will be more valuable enterprises in future, Selmo says.

Two investment decisions that have benefited the fund over the past three-and-half years during which First Pacific has been managing the