Regional versus sector: which is better?

If picking from a hand full of unevenly sliced straws was a proven method of investment selection, it might take the pressure off Australia’s fund managers somewhat. At least then, there would be a solid defence for any impending failure and the decision process would probably become more appealing.

However, as this isn’t the case, Australian fund managers are forced to use their knowledge to make investment decisions. It sounds simple enough.

Although, when managers are confronted with questions about how to accurately decipher which investment focus investors should place their money in — particularly when money is sailing off to Asia, the US and the UK — many would prefer to take the straw theory as a back-up option.

So what is the current state of affairs in the international investment market? Which way is the market turning — regional or to a sector focus?

Without grasping for straws, AMP head of strategy and chief economist Shane Oliver says current trends of the financial markets indicate that sector focus is heading the charge.

Oliver says there is indeed a shift in movement by investors from a regional focus to a sector focus. However, he says this isn’t a sudden shift by any means. In fact, the move to a sector focus has been slowly happening for quite some time.

“This shift has been under way since the late 1990s. The dominate driver has been the sector,” Oliver says.

“However, fund managers and investors have to have a view on the sectors and not just the countries. We’ve seen a move away from the regional approach, which divide it up among regional teams. Now increasingly, the original move is to a matrix, which is how some fund managers have gone through to the sector,” he says.

So what are the drivers of this shift?

Deutsche Asset Management head of retail Bruce Murphy attributes the shift to cross border operations. Murphy says a lot of companies are seeking worldwide leadership and they are experiencing cross border transactions, which are driving revenue outside of their home country. For example, telecommunications group Nokia has a large percentage of stocks in US markets.

“More and more people are thinking they would like [to invest in] the world’s leading pharmaceutical fund, or a financial fund. Some believe this can give you better risk return outcome,” Murphy says.

“The impact for fund managers [is that they are] organising [themselves] into global sector teams. From an investment manager standpoint, you have to organise yourself,” he adds.

On the local front, however, Murphy believes that Australia’s market is too small to feel the shift which has been felt more at a global level.

“At this stage, it hasn’t flowed through strongly to Australian retail investors. Possibly because we’re a smaller market, so products can’t offer the range of the sectors that would be offered overseas.

“It has the potential to grow in Australia. We’ve got a growing funds management market. But the environment at the moment is not conducive for the short-term because international investing has been hit by the strength of the Australian currency, combined with the weakness in global indices. People are probably reticent in global investing at the moment,” he says.

Rebutting Murphy’s point, Oliver does not believe such reluctance by investors to place their money in global stocks is waivering. In fact, he believes the supposed lack of interest by investors is just the developments of time.

“If you look at relative performance in recent times [the popular investments have] been consumer staples and basic industries, with a shift away from tech which has been the worst performer,” Oliver says.

“Consumer staples have not been particularly affected by economies. Utilities have relatively high yields, while basic industries are out of favour. Energy has done well because the prices have rebounded a bit and services are just a function of something more stable. It does vary, but they are the most popular ones,” he says.

“[As for] financials, it varies on the country. Australia is more financially popular. People have been interested in high yields, steady flow into utilities, while investors have shied away from risky markets such as technology and telecommunications,” Oliver says.

However, while both Oliver and Murphy strongly believe the industry is shifting towards a sector focus, BT International Fund portfolio manager David Mills is not so confident with this direction.

Despite attesting that a shift has occurred, Mills does not believe the assumption that a sector focus is currently leading the way is accurate.

He says in the past seven, eight and 10 years, there has been macro country and regional investing. As well as this, Mills says there has also been a trend, in the past three to five years where there has been a sector focus, within a matrix. So then, what line is Mills taking?

“It’s got to be both. A global sector approach, but you can’t forsake the local awareness. The world is becoming more the matrix. In the institutional mandate, there are some regional and technology. However, any sector mandates have disappeared,” he says.

In line with his belief in managers and investors taking stakes in both sectors and regions, Mills says that the real difficulties came in 1997 and 1998 with the Russian collapse, which had huge repercussions and scared many investors out of certain regions.

He says historical financial events such as these drove a lot of issues from Asia. But now, according to Mills, the industry is “throwing people back to Asia”.

“It’s almost five years ago, and the Asian markets have cleaned up and become more focused on creating more fundamental wealth. In the past six to 12 months investors have more confidence in the Asian markets.

“As for the US, September 11 didn’t drive people away. US investors pulled back to domestic but the US tends to do that when things get uncertain. Other investors wouldn’t say that was evident,” Mills adds.