Guiding through the globe

Australian equities have always provided solid investment options for Australian investors over the last few decades.

However, these domestic options are limited and with major markets in America, Europe and Asia, as well as emerging markets with high potential, there’s good reason to branch out.

The potential to explore the unique opportunities provided by global equities creates the temptation to try out new markets with qualities lacking domestically.
Charles Stodart, investment specialist for Zurich Investments, said the fundamental quality of global equities was a broader investment universe. 

“Australia only makes up about 2% of the global listed market, so including global equities into that space provides a broader universe that means you have access to industries you don’t have access to in Australia,” Stodart said.

The ACS Equity – Global sector has seen returns of 42.9%, over the past three years to 30 September, 2019.

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In the same time period, the Zurich Investments Concentrated Global Growth fund has delivered 79.8%.

Zurich has five manager-partners, so they don’t manage money in house, but partner with established investment managers instead. In the case of the Concentrated Global Growth fund, they partnered with a manager called American Century. 

“Firstly, we’re looking for an experienced investment team, we also want to understand that the product is differentiated, and it meets a specific portfolio need,” Stodart said. 

“We want to see a demonstrated ability to deliver through cycles, so essentially a proven track record.

“Above all, we think investors need to choose a manager that has a long-term investment approach.” 

Peter Dymond, executive manager investments at Colonial First State (CFS), said when putting together a multi-asset portfolio it was all about diversification. 

“If you think of the opportunities in Australian equities, it’s predominantly banks and resource companies,” Dymond said. 

“Whereas if you go overseas you get a much more balanced and different set of exposures than what you could get in Australia, particularly around tech and healthcare which are probably the two sectors that jump out.”

The CFS Generation Global Share fund has delivered 73.1% over the past three years to 30 September, 2019, although that fund is no longer open to new investors on their platform.

The CFS FirstChoice Acadian Wholesale Geared Global Equity fund has delivered 69.8% over the same time period.

The Acadian fund has taken advantage of the availability of major tech stocks, with interests in Microsoft (4.1%), Amazon (2.9%) and Alphabet (2.3%) being among its highest share of holdings.

Similarly, Zurich’s Concentrated Global Growth fund held 4.7% in Amazon, but also 3.7% in Alibaba, the Chinese online store that competes with Amazon.

Going global creates a different set of economic drivers and opportunity, which not only open up different markets, but different types of markets.  

“It’s a far greater opportunity set, Australian equities has only a couple thousand stocks in total,” Dymond said. 

“The ASX 300 is a pretty small universe, whereas when you go globally, the indices start off with 1,500 stocks, and there’s probably only a handful of Australian stocks in there.

“The opportunity is massive for managers to ultimately generate returns.

“The other part to keep in mind is the role currency might play in the portfolio construction because currency exposure in itself is a diversifier.” 

WHAT SHOULD ADVISERS LOOK FOR?

The range of global equities might give ample choice for people looking to invest, but ultimately fees are going to be front of mind for investors’ decision-making process. 

“What are their customers’ appetite for fees, that is really a big driver in behaviours today,” Dymond said. 

“We’re seeing considerable flows going towards passive management, largely driven by fee sensitivity of advisers or their clients, that’s a starting point.” 

But the other part advisers should look out for is how that exposure will fit in with other building blocks they might be using in their portfolio.

“Is it a value versus growth strategy, is it a quantitative strategy, is it a really high conviction strategy that’s really volatile? All those factors can influence it,” Dymond said. 

“The other area that might be a factor to some advisers is whether they have some strong philosophical beliefs.” 

This could include advisers – or the clients – who have strong sustainability or stewardship beliefs. 

Michael Collins, investment specialist at Magellan Asset Management, said advisers should judge global funds on whether or not they are underpinned by a clear investment philosophy.

“They should choose global funds where their objectives align with those of their clients, they should prefer managers that are transparent,” Collins said.

“They should also look for funds that have an impressive history of performance, one that includes a history of outperforming in falling markets.”

Another factor is the inclusion of emerging markets such as China, Brazil and India in global funds as there is a difference in nature between them and developed markets. 

“Some can behave very much like developed markets, whereas others are still very much on the other end of the spectrum, more like a frontier market,” Dymond said.

Whether funds invest in developed or emerging markets is dependent on the mandate of the fund. 

“It depends on the benchmark that you’re looking at but ultimately, it’s around identifying companies that exhibit the same criteria,” Stodart said. 

“It’s about looking to weight them appropriately, given the geopolitical or macro factors that could be involved with investing in emerging markets.”

EXISTENTIAL THREATS

Although the upside of global equities is the range of unique opportunities, the downside is there isn’t always the same level of stability as you would get in Australia and funds need to take this into account. 

Australia has its political and economic challenges, but its market has largely provided a consistent backdrop to develop wealth. Whereas it has been a challenging time for global equities as the United States deals with the unpredictably of President Trump, particularly his trade war with China. Across the Atlantic, there’s also the uncertainty over Brexit and what a post-Brexit European landscape will look like.

“If you look at the breadth of strategies that might be out there, at one end of the spectrum, you’ve got index funds that don’t take into account those types of threats,” Dymond said. 

“Then you have concentrated portfolios or systematic type strategies, once again, they’re reasonably well diversified. It’s only when you start to get into the more skills-based strategies, that you might see managers focusing on this.”

Dymond said it was probably only a small percentage of those funds that have an explicit top-down process that might attempt to take in macro components.

“But they are typically big decisions, they can go one or two ways and it’s very easy to get it wrong,” Dymond said. 

It is the managers that can navigate threats like Brexit that are the ones who effectively look through the long-term and are comfortable with short-term macro events. 

Stodart said the existential threats presented to global markets had created a challenging, complex exercise currently. 

“For American Century, their view at the moment is they absolutely acknowledge that global growth is slowing, and corporate earnings growth continues to slow as well,” Stodart said. 

“There are always going to be uncertain factors that you have to manage for, their approach is really to look through what’s happening at the index level to uncover individual situations.” 

Stodart said they’re looking for secular growth, rather than cyclical growth and the investment team retains a bias for companies that are the beneficiaries of longer lasting secular growth drivers.

Typically, these opportunities are more independent of the overall swing in the macroeconomic cycle and focus on companies with a highly-visible revenue base.

“That provides confidence in terms of the earnings stream going forward and there are always going to be companies which are self-helping, which they would call idiosyncratic growth drivers,” Stodart said.

“And these could be companies that may be conducting mergers and acquisitions, they may have bought another company, they may be looking to improve margins within their own company.”

Stodart said there are several examples within the portfolio which lend to that idea and rather than looking at the overall market they acknowledge that it’s a tricky environment which needed to be actively navigated. 

“They’re really focused on the fundamental bottom-up research at the companies themselves and that’s one of the benefits of an active approach,” Stodart said.

“If you’re an index investor, you’re very much exposed to the headline slowdown in corporate earnings.

“If you’re an active investor and particularly for funds which hold 30 to 40 stocks, you can express a far higher conviction in the types of companies that you’ve identified for your portfolio.”

Collins said issues such as trade wars and Brexit boost uncertainty, which undermines stocks, helps bonds and increases the risk of an economic slowdown.

“Lower rates in the short to medium-term favour bond-like equities and make companies that are poised to enjoy strong growth more attractive,” Collins said.

“When it comes to judging global managers, heightened uncertainty means planners should assess how good asset managers are at managing risk.”