With a team of five dedicated fund research analysts at his disposal, Andrew Summers, head of fund research at Investec Wealth & Investment, can afford to have a large buy list.
With more than 300 names, the list is significantly larger than most of his competitors. But, he explains, it is primarily designed to give the group’s 250-strong team of wealth managers the breadth and depth of choice needed to add value for their clients.
“We try to add value at three levels. The asset allocation committee tries to add some value, I try to add some value by hopefully the majority of those 300 funds outperforming and then the portfolio manager tries to add value by picking the right funds from the list. By definition, if your universe is reduced, you have reduced your potential to outperform.”
And, he adds, it is easy to get to 200 or 300 funds as soon as you start breaking it down into categories and styles, and whether or not they are closed or open-ended or if the manager is cautious or aggressive.
“I think it is quite difficult to see how, in a complex, changing investment world, people can really run decent, sophisticated portfolios with less than that.”
That is not to say each of the funds on the list will be appropriate at all times but rather that there are good funds to choose from, whatever one’s investment thesis.
Financial forecast
At present, the group expects equities will remain broadly positive during 2015, while global growth continues to accelerate. It expects America’s recovery to continue, Europe to muddle through and emerging markets to become a greater force as China slows down.
The other big change for 2015, according to Summers, will be the withdrawal of the extraordinary liquidity that has characterised the global financial system since 2010, though the firm expects this withdrawal will be both managed and manageable.
Contrary to some views, Summers says financial markets will adapt to modest changes to US monetary policy in a way that is not disruptive. On the basis of this outlook, equities are
Investec’s favoured asset class and have been for some time.
However, he adds that equity returns in 2015 will mostly be derived from dividends and earnings growth, rather than re-rating.
From a regional perspective, Summers says the group is underweight the UK, principally as a result of the index’s make-up, in particular its heavy weighting toward commodities. But he adds that there have also been a few issues related to the strength of sterling that have affected certain companies’ earnings.
The group is overweight Europe because of valuations.
“We think the cyclical prospects are improving and are really being underwritten by the European Central Bank,” he says.
Japan is another significant overweight because Investec believes there has been a sea change in monetary policy that should directly support a weaker yen, while at the same time raising inflation expectations and encouraging a domestic shift into equities.
“If you adjust for debt and the market cycle on an earnings basis, valuations are attractive in Japan,” says Summers. Investec accesses the market through the GLG Japan Core Alpha Fund and Polar Capital Japan. And, in deciding whether or not to hedge the currency back to sterling, Investec has taken the decision to hedge half of its exposure.
Emerging principle
Emerging markets is an area the group has been overweight for some time, and Summers says the continued development of the middle class and the consequent growth in consumption is a strong secular theme for the group.
However, while the firm has a number of managers on its lists that play into that theme and own good, cash-compounding companies, the challenge is that a lot of the companies exposed to this market are relatively expensive now.
As a result, Summers explains that Investec blends those managers with a more value-oriented approach.
“Having a valuation discipline in emerging markets is as important as in any other market, but there is a natural tendency for emerging market managers to have a quality bias. They feel that if you are going to be investing in these markets you really have to make sure everything is top notch and avoid any value traps.
“If you can find a manager that has a good value discipline, I think they tend to outperform. We would have a combination of good quality, cash-compounding growth stocks, and a manager that is willing to go into more beaten-up cyclical sectors on slightly lower valuations.”
Meanwhile, the firm has a neutral stance on the US.
“The market is clearly on a premium valuation and we would expect relative earnings momentum to deteriorate,” he says. “In other words, other economies will accelerate more during 2015.”
While the group favours equities, Summers does see some value in parts of the fixed income space, and believes that a balanced portfolio should have some exposure to duration from a protection point of view.
He says: “While developed market sovereign bonds offer limited total return opportunities, they retain an important role as an insurance asset, especially against outright deflation.”
As a result of this, the firm is overweight Europe, Japan and emerging markets from both a value and a recovery perspective.
The challenge, according to Summers, is that shorter-duration bonds are unlikely to add materially to performance relative to cash, and much longer duration does not represent good value unless there is a deflationary environment.
“We are looking at the seven to 10- year part of the curve. We do not expect to make huge amounts of positive money from sovereign bonds at all but, as we have seen in 2014, it does remain one of the best insurance policies against equity market corrections and deflation.”
Best in class
In terms of funds, Investec likes Newton’s International and Global Dynamic Bond, the Allianz Gilt Yield Fund and, in the strategic space, it holds M&G Optimal Income.
The firm is also underweight investment grade credit on valuation grounds, is neutral on high yield and emerging market debt. However, while the group is less enamoured with bonds, Summers says it has been looking closely at more unusual credit plays.
“The continued hunt for yield is important and that has led us into some interesting asset classes,” he says.
“There continues to be a need for private sector capital to go into building projects backed by government cash flows. George Osborne does not have the money to build hospitals and toll roads and GP surgeries but the country needs them, so private capital comes in and the Government is willing to pay a premium to take money off the private sector to build and run these assets.
“The benefit of this is that while one’s counterparty remains the UK government, the yield is significantly greater than on a gilt. And these sorts of asset tend to be a lot less cyclical than commercial property and also less correlated to equities than other asset classes.”
