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Global Equities: a disciplined approach to market uncertainty

From the impact of the coronavirus to their unique investing style, our Global Equities team explain how they are navigating the current market volatility.

Last week, Lewis Grant, Senior Portfolio Manager, sat down with Louise Dudley, Portfolio Manager, in our London office to discuss a recent event she took part in – a masterclass in global equities that tackled the most pressing questions about the asset class.

Below we provide three snippets of their conversation:

Part 1. The benefit of being a global investor in turbulent times

For Grant, being a global investor is beneficial in today’s uncertain and volatile environment. “Being global investors means that we can look across the entire spectrum of equities and see where the opportunities are. We can diversify, which means we can look for safer companies in different parts of the world,” he says.

Part 2: Our integrated investment approach

Our Global Equities team use a unique investment style, marrying a systematic approach, which minimises behaviour biases, with a fundamental analysis.

Dudley explains: “Behavioural biases are becoming increasingly important, particularly when we look at ESG. In the investment industry, there are a number of different data providers, but they have their own underlying biases as they try to measure different things.”

Part 3: Climate change in investment – it’s truly mainstream

In 2019, the second warmest year on record, the growing impact of climate change was undeniable: Japan endured a record typhoon, while unprecedented fires raged in Australia, the Amazon and California.

Grant says that climate change is now part of “everyday life and everyday conversation”.

“It has suddenly gone truly mainstream – and it’s going to become an even more important part of the companies in which we invest. There are so many examples of companies that in our view are un-investable because they are not thinking appropriately about climate change and how it will impact their business and their customers.”

Part 4: Our current thinking

We have witnessed continued volatility in equity markets since we recorded this catch-up on 10 March. At present, no one knows how long the Covid-19 pandemic will last, nor how deep the economic impact will be, but equity markets will rebound at some point. However, predicting when is impossible. Against this uncertain backdrop, our Global Equities team provide the following update:

  • In recent times, we have been closely following MulitFRAME, our proprietary risk model which assess top-down market risk, to measure our portfolios exposure to global trade, China and volatility. Our portfolios remain diversified with no concentration of risk from a top-down perspective and, crucially, with regards to underlying fundamentals of the companies we invest in. We believe this will be vital in negotiating turbulent times ahead.
  • Our proprietary Alpha Model assesses a company’s long-term prospects, by identifying those with the most attractive combination of fundamental characteristics or “factors”. Quite simply, the model favours companies with multiple positive qualities – and as one factor becomes significantly negatively correlated with other factors, the model tilts away from that factor.
  • Our portfolios exposures tend to be modest and vary over time based on the relationship between the factors. In recent years, the strong performance of ‘growth’ factors has led to stretched valuations of high-growth companies. In turn, the Alpha Model has been less able to find growth companies at attractive valuation, which has resulted in it moving away from high-growth companies and favouring cheaper companies with other strengths, such as stable balance sheets.
  • In recent years, our model has demonstrated that the relative valuation of growth companies has continued to increase, while the valuation of companies with stronger quality metrics (such as corporate behaviour and capital structure) is broadly unchanged. Our model has therefore favoured quality over growth – and in doing so, increased our exposure to both value and quality.
  • Indeed, late last year, in response to markets reaching all-time highs and the increased downside risk that this caused, we shifted to a more defensive stance favouring quality characteristics, such as balance sheet strength and consistent cash flow generation. These have been precisely the type of characteristics that investors have favoured in the market downturn and have helped the portfolios navigate this turbulent time.
  • Towards the end of February, we experienced a regime change in factors: the growth factor became extremely volatile and the capital structure factor (which measures a company’s balance sheet strength) became a vital consideration for investors, while the profitability factor has been consistently favoured since the start of the year. This is true in the US, Europe and Japan as well as across most sectors.
  • While we cannot predict when the pandemic will end, we have – and will continue to – add value by investing in a diverse range of companies with a strong balance sheet, strong growth prospects, and attractive valuations. In addition, we have found that companies that have a sustainable business model outperform in the long run.
  • Any investments overseas may be affected by currency exchange rates.
  • Past performance is not a reliable indicator of future results.
  • This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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