Louise Watson

Global asset manager, Natixis Investment Managers, has announced that its affiliate, Vaughan Nelson Investment Management (Vaughan Nelson), a Houston-based equity manager has been awarded an AU125m Global Small and Mid-Cap mandate by IOOF in its MultiSeries international shares portfolio.

Diversified listed financial services group IOOF Holdings Ltd (IOOF) is one of the largest investment management and super fund providers in Australia with more than $230 billion of assets under management.

The Vaughan Nelson Global SMID strategy is a concentrated portfolio of 40-80 stocks seeking long-term capital appreciation through investments in companies with a focus on targeted return. It leverages Vaughan Nelson’s 20 year experience investing in US small and mid cap companies. The strategy seeks to take advantage of market inefficiencies through a value-oriented bottom up process and targets a 50% return from every position over a three-year holding period.

Louise Watson, Country Head for Natixis Investment Managers, Australia and New Zealand said: “This mandate between IOOF and our affiliate, Vaughan Nelson, means that investors of IOOF’s MultiSeries product have exposure to both international companies, and also active management. We look forward to helping IOOF’s investors achieve positive outcomes through this new partnership.”

Chris Wallis, CEO and CIO of Vaughan Nelson, said: “Vaughan Nelson has been working with Australian clients who have been invested in our equity strategies since 2009. We are pleased to be entrusted with this mandate from IOOF, and believe that Vaughan Nelson’s expertise in global small to mid-cap markets will help further diversify the IOOF portfolio, ultimately benefiting fund investors. We look forward to an enduring relationship between IOOF, Natixis Investment Managers, and Vaughan Nelson.”

Stanley Yeo, IOOF Deputy CIO and Head of Equities, said: “In a recent review of our global equities portfolio, we decided the case for a global SMID allocation was compelling to improve the outcome for our investors. Following a global search, we were particularly impressed by the Vaughan Nelson team’s proven track record and disciplined investment approach. In addition, as a boutique firm, the appointment of Vaughan Nelson is consistent with our preference for boutique asset management firms running niche strategies.”

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Emerging market growth reached a low in 2016 and has exceeded expectations since.

Investing in emerging markets is not for the faint hearted. When people get nervous about equities, they tend to sell out of emerging markets and vice versa.  Unexpected political problems, such as corruption or weak economic growth, can also quickly derail a market.  However, there are many reasons and strong structural trends supporting emerging market equities.

The emerging markets account for approximately 80 per cent of the world’s population, almost 60 per cent of the world’s economy and the emerging market middle class is growing rapidly. Growth in emerging markets is very likely to significantly outpace that of developed economies. If forecasts by the International Monetary Fund turn out to be accurate, emerging market GDP will be over 27 per cent larger by 2021 while developed market GDP will only have increased by 9 per cent.

Mr. Stanley Yeo, Deputy Chief Investment Officer and Portfolio Manager, International Equities at IOOF said “From a cyclical perspective, emerging markets look attractive as emerging market stocks offer relatively cheap valuations and strong growth rates for earnings.  For five years, the asset class suffered from a multitude of hardships, among them a fall in oil and other commodity prices, the slowdown in China, political turmoil in nations such as Brazil and Turkey, and sanctions imposed on Russia.

“From early 2011 to early 2016, the SCI Emerging Market Index dropped over 40 per cent. Valuations fell to levels not witnessed since the Asian currency crisis of the late 1990s.  However, starting in mid-January of last year, buoyed in part by a resurgence in mining and petroleum, emerging markets have rebounded strongly.  Despite the jump, emerging market shares remain cheap – keep in mind that as at 30 June 2016 they are still 21 per cent cheaper than in 2011.”

The Shiller Cyclically Adjusted Price-to-Earnings multiple (CAPE) for the MSCI Emerging Markets Index is 15.6, up from around 10 at the trough in early 2016.  However, it is still 44 per cent below the reading of 28 for the US, its highest level since the tech bubble in 2001.  The CAPE eliminates sharp, temporary swings in earnings that can make shares look artificially inexpensive or pricey by using a 10-year average of inflation-adjusted profits.

Mr. Yeo commented, “The last time emerging market equities traded this cheaply relative to the developed world, they outperformed the S&P500 Index significantly over the next 12 years.”

Emerging market growth reached a low in 2016 and has exceeded expectations since.  In China, massive policy support helped drive increases in demand for goods and services.  China’s recovery also boosted demand globally for commodities, providing a tailwind and a path out of recession for Russia and Brazil.  India’s economy has also bottomed following the decline in activity resulting from the government’s move to demonetise and replace its largest bank notes.

Along with Brazil, Russia, India and China, many other emerging economies, including South Africa and Indonesia, have experienced significant improvements in current account balances over the past three years.  Furthermore, projected appreciation in emerging market currencies is another reason why emerging market shares are attractive.  The Mexican peso, Chinese yuan and Indian rupee are still more than 15 per cent undervalued versus the dollar, based on relative purchasing power.

Mr Yeo concluded, “While emerging market investors will always experience ups and downs, the main reason to invest in the region is to increase diversification and capture better growth prospects in the long term.”

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