Specialist research house Lonsec has highlighted risk as a key theme emerging from its most recent review of the Global Equity Funds sector.
Since the GFC, risk – or investor avesion to risk – has increasingly been driving investment decisions and product innovation in global equity funds.
“Globally, equity markets have yo-yoed, continually switching between greed and fear, optimism and despair,” said Rui Fernandes, Lonsec Senior Investment Analyst.
“The result has been product manufacturers busying themselves developing new solutions or reframing existing ones for risk-wary investors.”
The Lonsec Global Equity Sector Review highlights a number of emerging strategies.
“Quantitative managers are developing products that attempt to manage the volatility of the return stream,” said Fernandes.
“For the first time Lonsec included coverage of the Analytic Global managed Volatility Fund as part of this review. The underlying crux of this strategy is that the compounding power of low beta stocks, coupled with their lower volatility, should mean that the portfolio can outperform its benchmark but with less volatility or risk.”
Managed volatility strategies offer the prospect of market-like returns but with less volatility, which is where the attention has been over the past few years. In addition to the Analytic product, Lonsec is aware of a number of other managed volatility quantitative strategies in the pipeline.
“It is worthwhile keeping in mind that this style of investing is relatively new and while simulated results are encouraging, they are just that – simulations,” said Fernandes.
Aside from managed volatility, another trend to emerge during the review is the growing popularity of dividend-based global equities strategies. While not new, they have become more fashionable in recent years as international investors grapple with low yields and volatility across assets.
“Before the GFC, stable dividend paying companies were boring and uncool,” said Fernandes. “They weren’t the exciting go-go businesses associated with innovation and growth.
“Similarly, there has been a shift in emphasis to the virtues of ‘quality’ companies within many existing strategies, with the desirability of stable and growing earnings streams, low debt and high ROE suddenly more attractive.”
The almost universal shift in discussion to so called quality companies was one of the more pronounced features of this year’s review.
“Lonsec has noticed an increased emphasis, most pronounced during this review cycle, by fund managers to highlight the ‘quality’ aspect of their portfolios. Quality does have a trade off though. Investors usually pay a premium to invest in companies with a solid track record of delivering growth,” said Fernandes.
“The concern then becomes whether the almost uniform appetite for quality has been increasing the prices of these stocks and creating a ’quality bubble’.
“This phenomenon is not new and was last seen in the US during the 1960s and 1970s with the ‘Nifty Fifty’ – these were large stable growth companies whose price multiples grew with investor interest.
“We discussed this with fund managers during review meetings and while most felt this wasn’t likely, it did give them reason to pause and reflect,” Fernandes concluded.
