Global active fund managers struggle in 2010 & 2011
Since the start of the credit crisis in 2008 companies and governments have faced unprecedented economic challenges and elevated volatility across global markets. Research increasingly indicates active fund managers are struggling to outperform their benchmarks raising doubts as to whether active fund managers can still outperform over time.
This volatility and poor performance by active fund managers has come at a time when South Africa’s newly relaxed exchange controls have increased the need for competent and accurate analysis of both local and global active fund managers.
To this end Investment Solutions “has increased its interactions with global fund managers to around 200 meetings a year across key global asset classes including equities and fixed income, as well as flexible and alternative strategies such as property and commodities” says Linda van Tonder, Portfolio Manager, Offshore Funds, Investment Solutions.
The insight generated from these global fund manager contacts paint an informative picture of recent events while also providing direction on how fund managers are responding to this volatility.
In summary these meetings have revealed the following trends in the performance of active fund managers over the last decade:
· The number of global active fund managers outperforming their benchmarks has decreased in recent years
· Surveys don’t provide insight into reasons and hide survivorship bias, non-subscribers and extent of relative performance
· In a world in which markets are increasingly driven by liquidity, central bank intervention and other distortions, the reasons for active managers underperforming benchmarks may well prove defining in the long run
· Passive investing does not come free and involves an active decision, e.g. which benchmark to track
· Given skill and resources, finding active managers that perform well can add significant value, especially when combined with others that are un-correlated
Furthermore, an analysis of the performance of active fund managers over the last decade has revealed the following insights:
· In 2011, macro elements overwhelmed fundamentals in a risk-on, risk-off environment
· Second-guessing market swings based on sentiment was not an approach chosen by the company’s equity-active managers
· High-quality companies that could increase their dividends in this environment performed well in 2011
· Managers have not changed their processes following the overwhelming of macro elements last year
· Growth will be driven by emerging markets, but managers are finding more attractive opportunities in the developed world
· Stocks listed in developed markets with a substantial portion of their income derived from emerging markets are increasingly favoured in growth portfolios
Drilling down to more detail, questions most frequently raised and the responses received during global active fund manager meetings included:
Was 2011 a difficult year for active fund managers to outperform benchmarks?
Yes. Markets in 2011 vacillated between the risk-on and risk-off trades. Essentially, a number of periods during the year anticipated a binomial (two way / either-or) outcome that was hard for investors to second guess. Although many individual companies were in healthy shape with strong growth prospects and robust balance sheets, market sentiment drove markets, not company fundamentals. Macro overwhelmed micro and the correlation between stocks rose significantly, making it a difficult environment for stock pickers.
Which investment styles performed well in 2011?
The style in Global Equity that performed best was the growing high-dividend strategy, currently represented by Prudential M&G. Selecting high-quality companies that can increase their dividend payouts in most market environments tended to do well in 2011 despite sentiment-driven swings in the market. A diversified portfolio with the right balance and rotation between defensive and cyclical stocks, benefiting from the sell-off and market rallies, also outperformed the index.
Did stock turnover increase in 2011 in response to market volatility and uncertainty?
No, most managers’ stock turnover was in line with historic averages. Responding to short-term market sentiment and second guessing the swings in this sentiment was not an approach chosen by the managers. Some, such as Altrinsic and Prudential M&G, successfully switched from defensive to cyclical stocks around August, but this was not as a result of change in their process.
What has the experience been in 2012?
Most of the active managers in Global Equity that underperformed in 2011 have shown a good recovery in 2012. Equity markets have been strong and confident as risk appetite has returned, the macro environment has improved, backed by governments stepping in, and a number of companies have increased their dividend payouts.
Has it become more important to have a macro element and mindset to stock selection?
The equity managers maintain that the level of macro input in their process hasn’t changed over the years. Some of the selected managers, BlackRock and Altrinsic, have always had a macro mindset in portfolio construction. However, they emphasise that bottom-up stock selection remains at the core of their process, with macro more relevant for risk mitigation. Other managers, Orbis and Walter Scott, are religious believers in removing macro as a top-down driver and influence in stock selection.
Does the use of the MSCI World Index (representing stocks across 24 developed market countries) vs. the MSCI AC (representing stocks across 45 countries, including emerging markets at 13%) affect portfolio management?
No. All the selected managers are largely benchmark agnostic and have the ability and freedom to invest in emerging markets irrespective of the selected benchmark. Managers with segregated mandates are allowed to invest up to 30% in emerging markets. On average, however, the managers tend to have a 10% exposure to emerging markets.
Where are managers currently finding value?
Depending on style and investment approach, the managers are finding opportunities in different sectors around the world, more so than in specific regions. Individual stock selection rather than a macro focus drives these ideas. Consumer discretionary, technology, media and energy are some of the sectors currently favoured.
What is the view on stock selection in developed vs. emerging markets?
Although managers are of the view that growth will be driven by emerging markets, stock opportunities are still more attractive in the developed world. Better valuations, transparency and regulations can be found through stocks listed in developed-market stock exchanges, while the increasingly global nature of these companies means they can typically derive around 30% of their sale revenue from emerging markets. Managers prefer these stocks to gain indirect exposure to emerging markets. Companies with a long record of dividend growth in emerging markets are also fewer, with Brazil and Taiwan mentioned as the exceptions.
Investment Solutions’ selection of global active fund managers is informed by its manager research team in London. This team is dedicated to SA-managed offshore portfolios producing research-driven and qualitative views. As such, “the managers we select have proven track records of outperforming their benchmarks” says Van Tonder. The same process and philosophy is applied to Investment Solutions’ local and offshore multi-managed funds.
The performance of Investment Solutions global portfolios compared with local and offshore peers is evidenced by offshore data providers Morningstar and Bloomberg. Their extensive systems, which quote tens of thousands of fund returns across global asset classes, indicate that Investment Solutions’ portfolios “have performed well against their offshore peers with the Investment Solutions Global Equity portfolio achieving top-quartile status over one, three and five years in a 1 500-manager universe” concluded Van Tonder.
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