Lonsec’s latest Global Equity Fund Sector Review included 36 large cap and three small cap funds.
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Of these, nine large cap funds attained Lonsec’s top rating, Highly Recommended, including T. Rowe Price Global Equity Fund, Arrowstreet Global Equity Fund, Templeton Global Equities Fund, Aberdeen International Equity Fund (upgraded) and new entrant to Lonsec‟s universe, IFP Global Franchise Fund.
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Rui Fernandes, Senior Investment Analyst responsible for reviewing the sector, commented, “The distribution of product ratings were broadly stable across both the most recent and the previous sector review seasons.”
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Sector themes and observations
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Great minds think alike
“The degree of ‘commonality’ across Top 10 holdings is a curious and surprising outcome,” said Fernandes.
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“Only 172 different stocks held these highest conviction positions across the 26 portfolios – a remarkable observation considering that notionally, there is the potential for 260 different stocks (26×10) to occupy these positions out of some 1,500 in the MSCI World Index.”
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Companies that featured in several portfolios included Roche (which featured most prominently across the “Top 10‟ holdings, notably across seven of 26), Phillip Morris International, Nestle, Pfizer, Vodafone, Apple, Google, Hewlett Packard, Johnson & Johnson, and Wells Fargo.
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Fernandes commented, “The funds management industry’s process-driven stock assessments, with similar modelling and assumption methodologies, may be a significant driver of this outcome.”
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“However, there is also the possibility that an undeterminable degree of ‘herding’ (e.g. safety in numbers) may also be the cause, which may or may not be a conscious decision by investment managers.”
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Investment teams and portfolios stabilise
In last year’s report Lonsec noted that investment managers had mirrored the companies they invested in by seeking to control costs, with consequences for their investment teams. By contrast, this year’s review observed that investment teams were, on the whole, relatively stable.
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“Voluntary turnover has been witnessed across some managers but overall the trend has been muted,” said Fernandes.
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In last year’s report Lonsec noted that investment managers had mirrored the companies they invested in by seeking to control costs, with consequences for their investment teams. By contrast, this year’s review observed that investment teams were, on the whole, relatively stable.
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“Voluntary turnover has been witnessed across some managers but overall the trend has been muted,” said Fernandes.
“In response to the changing global growth dynamics, managers have been flagging their intention to ‘beef up’ their Asian coverage, either with transfers from their European or US offices or new regional appointments.”
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Asia still sparkling
Most investment managers tended to be mildly positive on the overall outlook for global markets, a noticeable change from the cautionary tone observed in last year’s review. However, the outlook for Asia, particularly for the Emerging Asian Region, was positive and continued to be the brightest star in the investment landscape.
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Fernandes observed, “Many see the main opportunity to be the rise of the middle class and increased consumption through the step-up in per capita income. This is believed to touch many sectors ranging from Financials and Consumer Discretionary.”
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Emerging markets – more than one way to ‘play’ the story
“While managers may disagree on the ‘cheapness’ or ‘richness’ (in terms of price) of emerging markets stocks in general, most did not dispute the long-term trends that are favourable for these investments,” commented Fernandes.
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“Managers generally fell into two camps – those that ‘played’ emerging market stocks directly and those ‘played’ them indirectly. For example, Nestle is a developed-market consumer staple stock whose incremental growth has been sourced from emerging markets. The incremental growth from emerging economies was a key attraction of the stock.”
The Lonsec report highlights that most managers had a degree of direct emerging market exposure at the time of review
Of the 26 qualitative products reviewed in this sector, Lonsec observed that there was a notable degree of “commonality” in the “Top 10” holdings as at June 2010 – the stocks considered to be a fundamental manager’s highest conviction positions, being the largest absolute/active weights.
