International managers look for the positives

International equities fund managers could be forgiven for holding their heads in their hands at some point over the past 12 months, as 2001 dealt the global financial markets a tough blow.

It was a blow that carved a major divide in the market, leaving only two out of the total 56 international equities managers recorded by InTech Research with positive performances.

The performance results of the remaining 54 international equities fund managers have sent shockwaves through the market, with many industry participants scrambling to decipher the reasons behind such a monumental performance collapse.

InTech Asset Consulting head of investment research Dennis Sams has been watching the performance of all 56 fund managers over the past 12 months and says it is important to remember that the past year has largely been characterised by a bear market. Further, the events of September 11 had a huge impact on the performance of international equities managers in the final quarter of 2001.

Sams says for the one-year period to January 2002, both the MSCI World Ex-Aust growth and value indexes experienced a significant decline, with the growth index falling by 21.5 per cent and the value index by 15.3 per cent.

However, despite this bleak market backdrop, value managers proved a market favourite, in particular, the style approaches of both Marathon and Bernstein, which outperformed the market by 4.7 per cent and 2.8 per cent respectively.

The median return for international equities was -13.9 per cent, with the lowest performance result recorded by Invesco, which lost 28.8 per cent.

“Marathon and Bernstein are both value managers. Value was much stronger internationally than locally, and that explains basically that they were well ahead of the value index,” Sams says.

According to the latest InTech report, value stocks outperformed growth on the international front by 6.2 per cent over the year to January 31, 2002. Interestingly, in the last six months of this period, growth stocks outperformed value by 4.8 per cent.

Alliance Bernstein senior portfolio manager Paul Bagnoli says one of the reasons the group was able to add significant value was due to the in-house research Bernstein conducts on companies. With 160 staff dedicated to research, 130 concentrate on the performance of international equities.

Sticking to its 30-year commitment as a value style manager, as well as using the branding of the New York-based group Alliance, are further reasons for the group’s positive outcome.

Bagnoli says the results are not surprising given the economic climate of the past year.

“As a value investor, when you have a difficult market, it’s not uncommon for a value manager to have positive returns,” he says.

“When markets become volatile and generally weak, it’s quite often that low stock prices that we’ve been buying are very low. That is why we had a lot of confidence we would generate positive returns. I’m not going to deny that there is not also an element of luck in investing,” says Bagnoli.

GMO Australia executive director John McKinnon, whose group recorded a result just outside the positive mark at -0.9 per cent, also believes the best performers picked the better value stocks.

“The best performing managers in 2001 were the value managers, of which we are one. We are strongly of the opinion that value investing will win over the long-term but there may be periods, like 1998/99, during which it struggles. There are significantly fewer value managers around these days, since many discarded that style of investing during the bubble years of 1998/99,” McKinnon says.

“However, for those who stuck to their guns like GMO, returns over the last five years are well ahead of the index. Growth managers may have had very large returns in 1998/99 but were significantly negative last year,” he adds.

Among the fund managers that did not perform well on the international equities front is AMP Henderson, which is now taking a pro-active approach to improving its strategy for the future.

“It’s been a tough year for international equities. The actual benchmark for the year was around negative 15 per cent and we under-performed the benchmark. Not wanting to rest with that, we’ve done a bit of rethinking,” AMP Henderson’s senior investment adviser international equities Christine Cameron says.

She says AMP Henderson has experienced all sides of the performance equation.

“It’s basically been a story of three chapters. We’ve experienced very strong out-performance, set a benchmark and significantly under-performed. It has been a bit of a wake-up call. We don’t want to change or undo the strength of our process. We want to increase the global sectors as key drivers of value,” Cameron says.

She says prior to this rethink, AMP’s global equities was run on a regional basis with a global equities person offshore managing the mandate.

However, AMP has now moved to a truly global portfolio, a move that is considered to be a natural progression of the Henderson operation.

“This restructure reflects the globalisation of equity markets and our business. We recognise we need to do something about it,” she says.