Investors in international equities need to be aware that fund managers who performed well in last year’s risk averse markets could be this year’s laggards if investor anxiety dissipates, according to Senior Investment Analyst Chris Bigg.
Bigg noted that managers with an investment style biased towards larger “quality” stocks – companies with high margins, high returns on invested capital, strong competitive advantages and earnings streams that are not particularly sensitive to economic conditions – outperformed in 2011.
However, managers biased towards these companies are likely to underperform their benchmarks if concerns over European sovereign debt continue to dissipate and markets rise this year.
Bigg said investors need to make sure their portfolios are not too heavily exposed to quality-biased managers if they are concerned about the potential for lagging the benchmark in a recovering market.
Global equities have risen significantly so far in 2012, although van Eyk believes the risk of another 12 months of flat or falling equity markets remains significant.
van Eyk awarded 18 ‘A’ ratings in its review of international equities strategies after considering 59 strategies in its recent international research tour. The ‘A’ rated funds were a mix of value, growth, neutral and absolute (benchmark unaware) styles of investing.
No fund received the top ‘AA’ rating, however the previously ‘AA’ rated IFP Global Franchise Fund was downgraded to an ‘A’. “This was not because we have changed our view of the abilities of the manager but because the fund has a significant concentration in consumer staples stocks and we think the value in this sector is not as compelling after a strong performance last year,” Bigg said.
IFP was the strongest performing strategy in its peer group during the period it was rated ‘AA’ and has generated cumulative returns greater than 15% above the benchmark over the 12 months to February 2012.
AQR, Franklin Global Growth and Schroder Global Active Value were upgraded to an ‘A’ rating in this year’s review.
Bigg said the chief goal of the review was to stress test van Eyk’s highly rated managers from the previous review in 2010. Those managers have, on average, outperformed their benchmarks since then.
van Eyk’s recently released Strategic Asset Allocation review recommends that 17 per cent of a balanced fund be allocated to international equities.
van Eyk believes consensus earnings estimates for global equities remain too optimistic and that markets are at the beginning of an earnings downgrade cycle. However, even if earnings miss current expectations by 15 per cent the market is still relatively cheap. The MSCI World Index is priced at just 12 times consensus 2012 earnings estimates.
Bigg noted the global equity risk premium was at the highest level for decades. “The earnings yield of approximately 8 per cent is very compelling versus the US 10-year government bond yield of two per cent and corporate balance sheets and cash flow are strong,” he said.
