Investment Insights - Research Trip Notes

MLC Investment Management
Investment insight
Research trip notes:
meetings with MLC’s global share managers
September 2013
I recently returned from a research
trip to Asia, Europe and North
America. My focus was visiting
managers of global shares and
global listed property. In visiting
11 cities, I met many of MLC’s
current and some prospective
investment managers.
These managers had some
interesting views about global
share markets, the macro
environment and the outlook.
Here are some of my observations.
Myooran Mahalingam
Portfolio Manager, Global Equities
& Global Listed Property
MLC Investment Management
Market returns
are likely to moderate
Most of the managers I met were
fundamental, bottom-up managers,
who typically assess the
attractiveness of individual
companies rather than markets.
However, they made some
interesting high level observations
on share markets.
Their views on the markets ranged
from “fairly valued” (at best) to
“struggling to see opportunities”
(at worst). This doesn’t mean that
markets are expensive. Rather, it’s
a reflection of the recent strong run
in share markets, which means it’s
an increasing challenge to find
companies with the potential for
significant share price rises.
The overall message from these
conversations was that in a low
growth economic environment,
future share market returns will be
more moderate than those of the
last 12 months.
Surprising strong
performers in the
market rally
The recent market rally has been
unusual in that defensive sectors –
those that are generally less
affected by market sentiment –
have performed best. For example,
sectors like Healthcare and
Consumer Staples have
outperformed, while Information
Technology has underperformed
over the last 12 months.
Generally, businesses that are
geared towards economic recovery
do well in a strong market, but that
hasn’t been the case in this
market rally.
That’s because rather than
supporting companies that are
reinvesting in their business for
future growth, investors have
rewarded companies that return
capital to shareholders (through
buybacks or dividends). With bond
yields very low for most of the last
12 months, investors have favoured
“bond proxies” – shares in defensive
companies that deliver income.
A challenging
macro environment
Another feature of the recent share
market rally is that it has been
based on investors’ growing
optimism about the global outlook
and investing in shares, rather than
on companies delivering earnings
growth. For the market rally to
continue, there needs to be
sustainable earnings growth.
Meetings with MLC’s global share managers Page 1
MLC Investment Management
Research trip notes:
meetings with MLC’s global shares managers
And the macro environment is still
uncertain. Despite monetary and
fiscal stimulus across the world –
on a scale never seen before –
the global economy is still only
growing moderately. What happens
when this stimulus comes to an
inevitable end?
In the European Union, new rules
on investment managers’
remuneration are being
introduced. While this mainly
targets hedge fund managers,
the way investment managers
are compensated continues to be
an issue to watch.
Our investment managers
acknowledge that the macro
environment is very difficult
to predict. As a result, they’re
focussing on businesses that can
grow shareholder value regardless
of what’s happening in the
macroeconomic environment.
Other observations
The impact of
increased regulation
These comments and anecdotes
give a flavour of managers’ views
on a range of topics.
Growing regulation is increasingly
impacting companies. This has
been seen in several ways:
At a time when governments
have large budget deficits, they
are looking at ways to increase
their revenue. For example,
Britain has led a push for
corporates to pay more tax
and not to funnel revenue
through tax havens.
A recent US migration bill has
explicitly restricted the number of
visas that can be given to foreign
nationals for jobs in the US. This
• energy and materials shares –
they have also fallen
significantly behind in the
market rally. Has the market
over-reacted to the slowdown
in commodity-related
spending, or could their prices
go down further?
is likely to hit some companies
hard, like Cognizant Technology
Solutions, an Indian outsourcing
company with part of its
workforce onsite in the US. Is this
protectionism in a different form?
I often asked investment
managers which area of their
portfolio was generating the
greatest debate within their
investment team. The responses
tended to focus on:
• Japan – will “Abenomics” work
and is the current Japanese
market rally sustainable?
• emerging markets – they’ve
been a significant laggard in
the current market rally, so is
this an opportunity?
The social cost of austerity in
Europe is high, but often
unreported. For example, a
successful fund manager retired
from Scotland to live in Monaco
and southern France. After being
burgled twice, he returned to live
in Scotland.
In the strong share markets of the
last 12 months, MLC’s global share
and global property managers have
managed their portfolios with
discipline and remained true to their
investment processes. With the
macroeconomic outlook still very
unclear, it’s important to be highly
selective about the businesses that
are purchased.
My discussions from the trip
indicated that MLC’s investment
managers are doing just that.
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