In the first of a two-part analysis of the asset class, Gill Wadsworth assesses what creates winners and losers in the space and asks whether any outperformance truly justifies the fees.
It has not all been plain sailing, but on the whole pension funds that kept their faith in stocks and shares have enjoyed returns of 6.98 per cent over the 10 years to March 2015 and 10.62 per cent over the past five years, as measured by the MSCI World Index.
For investors who backed a successful active manager, the spoils could have been even greater.
The table below shows the performance of the top global equity fund managers available to UK pension funds over the past one, three and five years, according to data and research company Camradata.
Picking the top global equity manager five years ago could have rewarded schemes with as much as 10 per cent more than the benchmark.
Camradata looks beyond performance to give an indication of the active manager’s skill. The rankings also take into consideration the information ratio, consistency (hit rate), and how often a bet pays off.
Picking winners
The managers that ranked highly, and indeed those that appear frequently across the data, attribute their success to a number of factors, but the emphasis is on stock-picking.
A bottom-up approach based on sound research and analysis is a common theme for the managers in the table.
Michael Spinks, head of the global multi-asset team at Investec Asset Management, said: “If we were to isolate one aspect that has driven performance, it has been very good stock-picking.”
Investec’s Global Franchise Fund, which was ranked second in Camradata’s global equity all-cap rankings in value terms (rather than the ‘core’ table above) over five years, constructs a concentrated portfolio of high-quality companies that the asset manager has identified as having “high barriers to entry and low capital intensity”.
These include companies with a significant number of patents and copyrights that are difficult for competitors to replicate.
Investec states that as there are very few of these types of stock out there, it places a huge emphasis on its fundamental research capabilities to find winners.
The story is similar at Axa, where the Axa Rosenberg Global Equity Alpha Fund gained first place in Camradata’s global equity core all-cap rankings over five years. Again the focus is on trawling a vast universe of stocks to find profitable companies.
Jane Wadia, global head of client portfolio management at Axa Rosenberg, says the fund manager reviews more than 20,000 stocks worldwide and “detailed research and fundamental analysis are at the heart of the stock selection process”.
We outperformed by 55 per cent in 2000-2006 and by 45 per cent between 1990 and 1996, so do you really want to argue about basis points when there are phenomenal returns to be made?
Dylan Ball, Franklin Templeton
At Franklin Templeton, however, the story is slightly different. The manager gained first place in the global equity all-cap, no predetermined style (not shown in the table here), and was ranked 10th in the global equity all-cap over three years – results it says are thanks to taking a contrarian position to its peers.
Dylan Ball, portfolio manager for global equities at Franklin Templeton, says: “We are often buying [stocks] when others are despondently selling and we sell when others are greedily buying.”
For example, Ball says Franklin has been selling off US stocks, even though they have been the driver of recent global equity performance, in favour of European companies. Ball is also buying oil-sensitive businesses and financials.
He said: “We are contrarian and like to buy something that is going cheap that no one else wants. We do the opposite to what the thundering herd does.”
Riding out the risks
However, all this stock-picking, bet-placing and, ultimately, risk-taking does have its downside.
The volatility of global equity markets makes them an uncertain place to play, and there is no question that when the tide turns against an active manager, investors can be left feeling horribly exposed.
Axa, Investec and Franklin Templeton all accept they have endured periods of underperformance, but they remain philosophical about the downs.
Axa’s Wadia says: “Part of determining whether you should go with an [active] manager or not is to look at their skill. One way to judge peoples’ skill is to look at their track record and everyone has a rough month or year, but it’s about how well we do overall.”
We are seeing a trend away from closet indexers to managers who are taking active bets
Suzanne Lubbe, Mercer
Importantly, investors paying active management fees need to find a truly active manager and avoid the closet index-huggers.
Suzanne Lubbe, manager researcher at global consultant Mercer, says investors are getting better at weeding out these secret passive managers and finding ones that offer genuine value for money.
“We are seeing a trend away from closet indexers to managers who are taking active bets and putting their money where their mouth is,” Lubbe says.
Cost versus value
The question of value is a pertinent one given the government’s recent interest in fund management fees.
The data in the table take no account of value lost to charges, and attempting to pin fund managers down on net of fees performance is a challenge.
However, they are steadfast in their defence of investors paying more for active management.
Ball says: “We outperformed by 55 per cent in 2000-2006 and by 45 per cent between 1990 and 1996, so do you really want to argue about basis points when there are phenomenal returns to be made?”
Global equities have offered a real opportunity for investors with the stomach for volatility and a willingness to absorb fund management fees.
However, finding the right manager is no mean feat, and for every successful fund there are another 10 that have not delivered.
Since past performance is no guide to the future, pension funds will need to keep the faith if they are to maintain a global equity position in today’s uncertain markets.
Gill Wadsworth is a freelance journalist
