Towerswatson Assetmanagerreview
MANAGERS believes an approach that captures the full dynamic of developments at both macro and stock level is imperative in structuring portfolios.
He says we should focus on identifying the key drivers of growth as well as the combination of drivers that would lead us to mitigate drawdown risk.
“Since 1998 there have been six major equity market declines. These are not ‘black swans’ but normal cycles, each caused by a very different set of drivers. Not having the ability or focus on mitigating drawdown risk in each of these periods is highly deleterious to the value of members’ savings.
“In building an investment portfolio we look to incorporate the macro drivers by taking them down to industry and then company level. As all drivers at country, industry and company level fit together the factors that drive earnings in companies are directly related to the industries that they are in.
“We prefer, in this process of review, to hold investments in companies that have strong pricing power and are able to maintain volume growth through down cycles without losing too much pricing power.
“The macro framework impacts asset allocation through focussing the portfolio on those key growth drivers not yet fully priced in by the market.” Roland Grabe at SYm|mETRY is sceptical of a thematic investment process that is not grounded by valuation discipline.
He says forecasting the future is a very low probability endeavour, if one’s objective is to exploit market inefficiency.
“We often see that thematic investors chase themes that are already correctly priced by the market. Examples of these include ageing populations, nanotechnology and green energy. Sometimes investing in unloved companies that operate in sectors where competition is limited yields much better long term returns.
“A classic example is evidenced when one compares the returns from investing in the tobacco industry against the returns from investing in IT over the last thirty years or so. Computers changed the world by increasing human productivity. Cigarettes are addictive and make people sick. But which was the better investment?” Matthew Warren, head of financials and retailers at FIRST AVENUE INVESTMENT MANAGEMENT says long-running trends (or themes) can continue, stall, or reverse.
“At First Avenue, we think there is no value in using themes to structure a portfolio. Instead, we analyse individual companies (within the context of their competitive set), looking for high quality companies that trade at a margin of safety to our view of intrinsic value.
“High quality companies selling into sustainable levels of demand can withstand more pressures than one might expect, and even thrive.” Sandy McGregor, portfolio manager, ALLAN GRAY says given the difficulty in making any sort of meaningful forecasts for the future, the company does not put a lot of weight on predictions in making investment decisions; rather it focuses on the current pricing of assets.
“We think the accumulation of assets at reasonable prices will result in superior returns for our clients, regardless of what the future brings.” Andrew Canter, CIO at FUTUREGROWTH says a portfolio must be an evolving construct, based on the changing outlook and market valuations.
Portfolios should be positioned for some of the long-term factors mentioned here, but experience teaches that a one-year view comes to fruition in a month, and a 20 year view is likely to play out over two years. David Knee, head of fixed income and asset allocation at PRUDENTIAL PORTFOLIO MANAGERS says the company does not believe it is possible (or worthwhile) to structure a portfolio or choose stocks according to our identification of future trends and the beneficiaries of these trends.
“Rather than trying to forecast the future, we focus on current valuation, be that at the level of a single stock or of a broad asset class. We combine these views into a prudently constructed portfolio where no single position dominates, since we respect the fact that we simply don’t know what the future will bring.”