Heightened risks in international share markets will make it even more vital that managers in this sector have superior stock selection skills and a robust, “bottom up” investment process, van Eyk Research commented upon the release of its International Equities Review 2013.
The new IEQ review examined 43 managers. Lead analyst Nimalan Govender said this year’s group was a more competitive field of managers than in the previous review.
“Managers needed to show they had the ability to deliver returns in excess of the benchmark given the heightened risk of volatile market conditions going forward.” Mr Govender said.
This was reflected in the spread of ratings. Nine managers were screened from the review because they were not sufficiently competitive. Four managers received van Eyk’s top AA rating, whereas no managers received the top rating in last year’s review. Fifteen strategies received an A-rating but three previously A-rated managers had their ratings downgraded.
Mr Govender said that given central banks had shown they were prepared to continue to pump huge volumes of liquidity into the banking system in an attempt to sustain economic growth, there was a higher risk of market volatility and managers needed to have an investment process that could handle this.
This meant managers had to demonstrate a clearly articulated investment process and show a particularly thorough understanding of the stocks and industries they were investing in.
“You need managers who can see through this volatility and have the conviction to choose quality stocks for the long term and avoid the stocks that will get an undeserved lift from the effects of the liquidity flood,” Mr Govender said. “If you don’t believe in your process you will chop and change stocks in this market environment.”
This kind of strong, “bottom up” research built investment ideas from the ground level and was more likely to lead to the original investment insights that enabled managers to find sources of return missed by the broader market. “These people don’t just pick up the Financial Times in the morning for their ideas,” Mr Govender said.
Managers which rated highly in the review had proven their ability in this area by delivering those excess returns and most with a level of volatility lower than the benchmark, he noted. A good example was the Platinum International Brands Fund, which has achieved annualised returns 5.41% in excess of its benchmark on a rolling 3-year basis.
Mr Govender said there was no clear majority view among the managers reviewed about the outlook for different regions. Some were underweight the US and overweight Europe while others had the opposite leaning. “It’s more a case of stockpicking rather than sector tilting among managers at this stage,” he said. “If there’s any trend it’s towards quality stocks with sustainable cashflows.”
van Eyk’s model balanced portfolio currently recommends an overweight exposure to international equities because their valuation is less than the long term average and they are better value than the Australian share market at the moment. However, van Eyk favours defensive stocks given the heightened risks in international markets.