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22 March 2016

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MYTH ONE: ‘THE GLOBAL EQUITY UNIVERSE IS TOO BIG TO RESEARCH EFFECTIVELY’

With an investible universe of more than 5,000 companies, anyone running a global equity fund has their work cut out if they are going to find the assets that will make a difference. The research required to whittle down that universe to a portfolio concentrated enough to focus on those with potential to deliver benchmark-plus returns is often considered the Achilles’ heel of global equity investing. Yet sophisticated research techniques mean it is possible to construct a vehicle that is diversified enough to satisfy sector classifications, but concentrated enough that every holding can be justified on a fundamental basis.

Bottom-up selection

Many active fund managers are bottom- up investors, citing their ability to identify potential changes to a company’s fundamentals ahead of the market, paving the way to serious returns. As Mikhail Zverev at Standard Life Investments (SLI) says: “We believe the most consistent source of alpha will come from bottom-up stock selection, so we focus most of our time, energy and efforts at the company level. “The market is not efficient at pricing the fundamentals that drive a company’s share price when they undergo or face a material change, therefore we secure and analyse information about the fast-changing corporate prospects of companies, concentrating on the most important factors that drive the market price of the investment.” However, while information around changes to the legislative or regulatory environment a company operates in can be fairly easy to come by, news on a competitor gaining a significant patent or a company restructuring may not be so readily available. To factor such news in, it is vital to have a dialogue with the companies in question. With so many stocks to choose from, no single manager would have the capacity to speak to them all, which is why large teams of analysts, with a structure that allows close collaboration across the various teams, is vital. Not only can they collectively cover the ground, but they can also react to news, seeking out ad hoc meetings as and when the need arises. This kind of analytical resource, says Kevin Troup at SLI, allows managers to be “open-minded and structurally unbiased about the opportunities we seek”.

Top down view

Top-down research also plays its part, with many managers taking the view that some countries are simply too volatile to include any stocks from, regardless of how suitable an individual company may be. On the other hand, a temporary fall in a particular currency could make stocks from an otherwise too-expensive country look attractive. But when it comes to global equity investing, success ultimately relies on picking winners regardless of the macro situation, and that requires real conviction.

It is one thing having teams of analysts feed their findings in to fund managers but if those analysts are running money too, they will have a more vested interest in making sure their stock-picks work. SLI operates a dual fund manager/ analyst role. This has two advantages: it makes stock analysis more pragmatic and focused on real investment returns, and, more importantly, it brings our people together in a team debate, where all involved are empowered to constructively challenge each other’s ideas.

Discursive approach

Knowledge of macro factors is essential but it is the ability to tease out information on individual companies ahead of the markets that makes a difference.

The global equity investable universe may be a big one to research but, with a team big enough to cover the ground and sophisticated enough to argue the case for individual stocks, it does not have to be an impossible one.

Global equity indices

MSCI World Index